<PAGE> 1
As filed with the Securities and Exchange Commission on September 9, 1996
Registration No.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1993
------------------
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
(Exact Name of Registrant as Specified in the Governing Instrument)
50 California Street, Suite 2020
San Francisco, CA 94111
(Address of Principal Executive Offices)
THOMAS B. SWARTZ
Chief Executive Officer
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
50 California Street, Suite 2020
San Francisco, CA 94111
(Name and Address of Agent for Service)
Copies to:
Stephen C. Ryan, Esq. Ronald Warner, Esq.
Wilson, Ryan & Campilongo Thelen, Marrin, Johnson & Bridges
115 Sansome Street, Suite 400 333 South Grand Avenue, Suite 3400
San Francisco, CA 94104 Los Angeles, CA 90071-3193
Tel: (415) 391-3900 Tel: (213) 621-9800
Fax: (415) 954-0938 Fax: (213) 623-4742
------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
------------------
The Registrant hereby amends this Registration Statement so such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 9(a),
may determine.
================================================================================
<PAGE> 2
- --------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTIONS>
Proposed
Title of Maximum Proposed Amount
Securities Amount Offering Maximum Of
Being Being Price Offering Registration
Registered Registered Per Share Price Fee
- ---------- ---------- --------- ----- ---
<S> <C> <C> <C> <C>
Shares of Common Stock,
par value $.01 1,500,000 $10.00 $15,000,000
Shareholder Warrants
to Purchase Shares of
Common Stock 150,000 $ 0.00(1) $0.00
Manager Dealer Warrants
to Purchase Shares of
Common Stock 150,000 $ 0.00(1) $0.00
Shares of Common Stock,
issuable upon exercise
of Shareholder Warrants 150,000 $ 7.00(2) $ 1,050,000
Shares of Common Stock,
issuable upon exercise
of Managing Dealer
Warrants 150,000 $ 9.00(3) $ 1,350,000
Total Fees Payable(4) $17,400,000 $6,000
</TABLE>
- ---------------
(1) No separate consideration is payable for the Warrants.
(2) Maximum price upon exercise of Shareholder Warrants.
(3) Maximum price upon exercise of Managing Dealer Warrants.
(4) The maximum number of Shares of Common Stock that can be issued initially
and upon exercise of the Shareholder and Managing Dealer Warrants is
1,800,000 and their maximum offering price is $17,400,000. The registration
fee for the Common Shares issuable is therefore $6,000.
In addition, the Registrant has entered into Indemnity Agreements
(Exhbit 10.2 hereto) with its officers and Directors. The Underwriting Agreement
Exhibit 1.1) also provides for indemnification by the Underwriters of the Trust,
its Directors and officers and persons who control the Trust within the meaning
of Section 15 of the Securities Act with respect to certain liabilities,
including liabilities arising under the Securities Act.
Item 34. Treatment of Proceeds From Stock Being Registered
Not Applicable
Item 35. Financial Statements and Exhibits
(a) Financial Statements included in the Prospectus are:
1. Pro-Forma Combined Financial Statement of Capital Alliance
Income Trust, A Real Estate Investment Trust with Independent
Auditor's Report as of December 31, 1994, December 31, 1995
and April 30, 1996.
All schedules have been omitted because they are either not
applicable, not required or the information required has been disclosed in the
financial statements and related notes or otherwise in the Prospectus.
<PAGE> 3
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
Cross-Reference Sheet Showing Location in Prospectus
or Registration Statement of Information
Required by Items 1-29
(Pursuant to item 501(b) of Regulation S-K)
<TABLE>
<CAPTION>
Form S-11 Items Number and Caption Caption in Prospectus or Page Reference
---------------------------------- ---------------------------------------
<S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus... Forepart of Registration Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus...................... Inside Front Cover Page of Prospectus; Outside Back
Cover Page of Prospectus
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges....... Prospectus Summary; Risk Factors
4. Determination of Offering Price.............. Outside Front Cover Page of Prospectus; Risk Factors;
Plan of Distribution
5 Dilution..................................... *
6. Selling Security Holders..................... *
7. Plan of Distribution......................... Outside Front Cover Page of Prospectus; Plan of
Distribution; Dividend Reinvestment Plan
8. Use of Proceeds.............................. Prospectus Summary; Estimated Use of Proceeds
9. Selected Financial Data...................... Selected Financial Data and Comparative Share Data
10. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
11. General Information as to Registrant......... Prospectus Summary; The Trust; Business
12. Policy with Respect to Certain Activities.... Inside Front Cover Page of Prospectus; Risk Factors;
Business; Summary of Organizational Documents and
13. Investment Policies of Registrant............ Securities; Additional Information
14. Description of Real Estate................... Prospectus Summary; Rick Factors; Business
15. Operating Data............................... Selected Financial Information and Comparative Per
Share Data; Index to Financial Statements
16. Tax Treatment of Registrant and Its
Security Holders......................... Prospectus Summary; Risk Factors; Federal Tax
Consideration; ERISA Investors
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
17. Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters...................... Prospectus Summary; Risk Factors; Distributions and
Dividend Policy; Dividend Reinvestment Plan, Sources
of Additional Funds; Plan of Distribution
18. Description of Registrant's Securities....... Outside Front cover Page of Prospectus; Prospectus
Summary; Summary of Organizational Documents and
Securities; Federal Income Tax Considerations; ERISA
Investors
19. Legal Proceedings............................ Business
20 Security Ownership of Certain Beneficial
Owners and Management.................... Prospectus Summary; The Trust; Business
21. Directors and Executive Officers............. Management
22. Executive Compensation....................... Management
23. Certain Relationships and Related
Transactions............................. Risk Factors; Business; Relationships with Affiliates
24. Selection, Management and Custody of
Registrant's Investments................. Business; Risk Factors
25. Policies with Respect to Certain Transactions Risk Factors; Business; Relationships with Affiliates
26. Limitations of Liability..................... Rick Factors; Business
27. Financial Statements and Information......... Selected Financial Information; Index to Financial
Statements
28. Interests of Names Experts and Counsel....... Experts; Legal Matters
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. *
</TABLE>
- -------------
* Not Applicable
iii
<PAGE> 5
CAPITAL ALLIANCE
INCOME TRUST
1,500,000 SHARES COMMON STOCK
With Warrants to Purchase 150,000
Additional Common Shares.
Capital Alliance Income Trust, A Real Estate Investment Trust (the
"Trust") is a specialized mortgage banking firm, incorporated in Delaware that
intends to qualify as a real estate investment trust ("REIT") for federal income
tax purposes. In its existing portfolio lending business, the Trust invests
primarily in collateral-oriented, high-yielding non-conforming home equity loans
("Home Equity Loans") secured primarily by first and second deeds of trust on
single-family residences and two-to-four-unit residential properties located in
California and other western states ("Mortgage Investment Business").
The Trust, either directly, through a non-qualified REIT subsidiary, or
indirectly, through a joint venture, and as an adjunct to its Mortgage
Investment Business, also plans to utilize a portion of the proceeds of this
offering to establish and conduct a wholesale non-conforming residential
mortgage banking business specializing in non-conforming, B/C credit-rated
residential mortgage loans ("Mortgage Conduit Business"). It is anticipated that
the mortgage loans to be originated or purchased by the Mortgage Conduit
Business initially will be packaged and sold in whole loan sales at a premium to
institutional investors and ultimately may be securitized.
THESE SECURITIES INVOLVE CERTAIN RISK FACTORS. (See "Risk Factors.")
These risks include:
- General Lending Risks;
- Effect of Competition and Demand for Non-Conforming Loans and
Independent Mortgage Loan Brokers;
- Consequences of Failure to Maintain REIT Status; Trust Subject to
Tax as a Regular Corporation;
- No Prior Public Market for Common Stock;
- Planned Expansion and Formation of Mortgage Conduit Business;
- Relationship with Capital Alliance Advisors, Inc. and Its
Affiliates; Conflicts of Interest;
- Dividend Preferences;
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Price Underwriting Proceeds
to the Public Commissions(1) to the Trust(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $10.00 $.60 $9.40
(Minimum investment 100 Shares)
Total Minimum (50,000 Shares) $500,000.00 $30,000.00 $470,000.00
Maximum if 1,500,000 Shares Sold (3) $15,000,000.00 $900,000.00 $14,100,000.00
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Notes to Table, Page 2)
The holders of the Trust's outstanding Series "A" Preferred Shares (the
"Preferred Shares") as a class have (1) a stated preferential, non-cumulative
right to distributions declared each year by the Board of Directors and (2) a
specified preference with respect to liquidating distributions. (See
"Distributions to Shareholders" and "Summary of Organization Documents and
Securities.")
There is and will be no public market for the Common Shares (the "Shares")
until the conclusion of this Initial Public Offering. The Trust is applying for
listing of the Shares on the NASDAQ National Market System ("NASDAQ") subject to
official notice of issuance. To satisfy NASDAQ's criteria for listing, until a
minimum of $500,000 in subscription funds have been accumulated in escrow
("Minimum Subscription Level") with Golden Gate Bank ("Escrow"), San Francisco,
California, and certain other conditions have been satisfied, the proceeds of
the offering will remain on deposit with Escrow and will not be available for
operations of the Trust. (See "Plan of Distribution.")
----------------------------------------
BROOKSTREET SECURITIES CORPORATION
The Date of This Prospectus is _________________, 1996
(The cover page is continued on the following pages.)
<PAGE> 6
In addition to issuing Common Shares, the Trust will issue to
shareholders Warrants to purchase additional Common Shares ("Shareholder
Warrants" or "Warrants"). The Trust will issue one Shareholder Warrant for each
10 Common Shares purchased. However, no Shareholder Warrants will be issued as a
result of purchases of Shares under the Trust's Dividend Reinvestment Plan. Each
Shareholder Warrant entitles the holder to purchase one Common Share at $7.00
per Share. The Shareholder Warrants may be exercised during the twenty-fifth
through the forty-eighth month following the effective date of this offering.
Shareholder Warrants for fractional Shares will not be issued. (See "Summary of
Organizational Documents and Securities: Description of Shareholder Warrants.")
All Shares and Warrants will be held in uncertificated form during the
offering period. Certificates evidencing ownership of Shares will be issued to
requesting shareholders upon the conclusion of the offering and certificates
evidencing ownership of Warrants will be issued to shareholders upon written
request at the commencement of the Warrant exercise period. (See "Plan of
Distribution.") The Shares and Warrants will be freely and separately
transferable, except to the extent set forth under "Summary of Organizational
Documents and Securities: Redemption of Shares and Prohibition of Transfer of
Shares and Exercise of Warrants." The public offering price of the Shares and
the exercise price of the Warrants have been determined arbitrarily by the Trust
and Managing Dealer.
NOTES TO TABLE ON COVER PAGE:
(1) The Trust will pay retail commissions of up to 6% on the sale of Shares
during the initial offering period. The Shares and Warrants will be
offered through Brookstreet Securities Corporation, Irvine, California
("Managing Dealer" or "Brookstreet") and other selected selling agents
(collectively the "Managing Dealers"). There is no firm commitment to
purchase or sell any Shares or Warrants. The offering will terminate one
year from the date hereof unless extended by the Trust for up to an
additional year. (The Trust will pay broker/dealers $0.25 per share upon
the exercise of Shareholder Warrants for costs associated with the
exercise of warrants facilitated by such broker.) The Trust has agreed to
indemnify the Broker/Dealers with respect to certain liabilities,
including liabilities under the Securities Act of 1933 as amended (the
"Act").
(2) Before expenses, estimated at $600,000, all of which are payable by the
Trust. The Managing Dealer will also receive reimbursement for offering
services which consist of expenses relating to legal, accounting, due
diligence, printing expenses, a non-accountable underwriting fee of
$35,000, and for other expenses relating to the registration, marketing
and distribution of the offering (other than retail sales commissions).
This reimbursement is limited to $0.30 per Share for each Share sold
during the Initial Public Offering. The Managing Dealer will also receive
a non-accountable expense allowance equal to $0.10 per share. No retail
sales commission will be paid to the selling broker/dealers on Shares
purchased through the Dividend Reinvestment Plan.
The Managing Dealer or its designees will also receive Warrants to
purchase up to 150,000 Common Shares ("Managing Dealer Warrants" or
"Warrants"). Each Managing Dealer Warrant entitles the holder to purchase
one Common Share at $9.00 per Share and may be exercised from the
twenty-fifth through the forty-eighth month following the date of this
offering.
(3) If 1,500,000 Shares and 150,000 Shareholder Warrants are issued and all
Shareholder Warrants are exercised at $7.00 per Share, the "Price to the
Public" of all securities sold hereunder will be increased to $16,050,000
and the "Proceeds to the Trust" will be increased to $15,112,500. If less
than all the Warrants are exercised, these amounts will be
correspondingly decreased.
SPECIAL NEW YORK REQUIREMENTS. Each purchaser of Shares in New York must
certify that the purchaser has either (i) a minimum annual gross income of
$35,000 and a net worth at fair market value of at least $35,000 (exclusive of
equity in home, home furnishings and personal automobile), or (ii) a net worth
of $10,000 (similarly defined). No purchaser of Shares in New York may initially
purchase less than 250 Shares ($2,500) (100 Shares [$1,000] for IRA
investments).
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF SOLICITATION IN
ANY STATE OR OTHER JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR
2
<PAGE> 7
SOLICITATION IN THAT STATE OR JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT NO CHANGE IN THE AFFAIRS OF THE TRUST HAS OCCURRED SINCE THE
DATE HEREOF. IF, HOWEVER, ANY MATERIAL CHANGE IN THE TRUST'S AFFAIRS OCCURS
DURING THE TIME THIS PROSPECTUS IS REQUIRED TO BE DELIVERED, THE TRUST WILL
AMEND OR SUPPLEMENT THIS PROSPECTUS APPROPRIATELY.
SUPPLEMENTS UPDATING THIS PROSPECTUS WILL BE CONTAINED INSIDE THE BACK
COVER.
3
<PAGE> 8
THE TRUST INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS AUDITED BY ITS INDEPENDENT AUDITORS AND
QUARTERLY REPORTS FOR THE FIRST THREE QUARTERS OF EACH FISCAL YEAR CONTAINING
UNAUDITED FINANCIAL INFORMATION.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY ................................................... 5
The Trust ....................................................... 5
Management ...................................................... 6
Distributions and Dividend Policy;
Dividend Reinvestment Plan .................................. 6
The Offering .................................................... 8
RISK FACTORS ......................................................... 9
Lending Risks and Related
Considerations .............................................. 9
Business Risks and Related Considerations ....................... 11
Tax and Regulatory Risks and Related
Considerations .............................................. 13
Financing Risks and Related
Considerations .............................................. 14
Conflicts of Interest and Related
Considerations .............................................. 15
THE TRUST ............................................................ 17
ESTIMATED USE OF PROCEEDS ............................................ 18
SOURCES OF ADDITIONAL FUNDS .......................................... 19
DISTRIBUTIONS AND DIVIDEND POLICY;
DIVIDEND REINVESTMENT PLAN ........................................... 20
CAPITALIZATION ....................................................... 22
SELECTED FINANCIAL INFORMATION
AND COMPARATIVE SHARE DATA ...................................... 23
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ....................................... 27
General ......................................................... 27
Results of Operations; Capital Alliance
Income Trust I .............................................. 28
Results of Operations; Capital Alliance
Income Trust II ............................................. 28
Inflation ....................................................... 29
Liquidity and Capital Resources ................................. 29
BUSINESS ............................................................. 31
General ......................................................... 31
Mortgage Investment Business .................................... 32
Mortgage Conduit Business ....................................... 33
Hedging ......................................................... 36
Loan Servicing .................................................. 36
Competition ..................................................... 36
Regulation ...................................................... 37
Employees ....................................................... 38
Properties ...................................................... 38
Legal Proceedings ............................................... 38
MANAGEMENT ........................................................... 39
Directors and Officers .......................................... 39
The Manager ..................................................... 41
Management Agreement ............................................ 43
Management Compensation ......................................... 43
Management Expenses ............................................. 43
Limits of Responsibility ........................................ 44
Home Equity Loan Origination and Loan
Servicing Agreement ......................................... 44
Origination and Servicing Expenses .............................. 44
RELATIONSHIPS WITH AFFILIATES ........................................ 45
Arrangements and Transactions with CAAI ......................... 45
Investment in Related Mortgage
Banking Firm .................................................... 45
Sale and Purchase of Loans ...................................... 45
SUMMARY OF ORGANIZATIONAL
DOCUMENTS AND SECURITIES ........................................ 46
Description of Shares ........................................... 47
Dividend Preferences ............................................ 47
Directors ....................................................... 48
Amendment of the Certificate of
Incorporation and Bylaws .................................... 48
Shareholder Limited Liability ................................... 48
Redemption of Shares and Prohibition of
Transfer of Shares and Exercise of
Warrants .................................................... 49
Reports to Shareholders and Rights of
Examination ................................................. 49
Description of Shareholder and Managing Dealer
Warrants ........................................................ 49
FEDERAL TAX CONSIDERATIONS ........................................... 51
Taxation of the Trust ........................................... 51
Record keeping Requirements ..................................... 56
Failure to Qualify .............................................. 56
Taxation of Taxable U.S. ........................................
Stockholders Generally ...................................... 56
Information Reporting and
Backup Witholding ........................................... 57
Taxation of Tax-Exempt Stockholders ............................. 58
Taxation of Non-U.S. Stockholders ............................... 58
Other Tax Consequences .......................................... 59
ERISA CONSIDERATIONS ................................................. 60
Fiduciary and Prohibited
Transaction Considerations .................................. 60
Plan Asset Issue ................................................ 60
PLAN OF DISTRIBUTION ................................................. 62
Sales Material .................................................. 63
LEGAL MATTERS ........................................................ 64
EXPERTS .............................................................. 65
ADDITIONAL INFORMATION ............................................... 66
GLOSSARY ............................................................. 67
DIVIDEND REINVESTMENT PLAN ........................................... 72
INDEX TO FINANCIAL STATEMENTS ........................................ 75
HOW TO INVEST; ORDER FORM ............................................ 115
</TABLE>
4
<PAGE> 9
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statement appearing elsewhere in this Prospectus.
Capitalized and certain other terms used in this Prospectus are defined in the
"Glossary."
THE TRUST: Capital Alliance Income Trust, A Real Estate
Investment Trust (the "Trust" or "CAIT") is a
specialized mortgage banking firm which is in the
business - as a portfolio lender - of originating,
purchasing and servicing collateral-oriented,
high-yielding non-conforming, B/C (or less)
credit-rated home equity loans secured primarily by
first and second deeds of trust on single-family
residences and two-to-four unit residential
properties located in California and other western
states ("Home Equity Loans") ("Mortgage Investment
Business").
The Trust, which will elect to be taxed as a REIT,
resulted from the consolidation in April 1996 of two
private affiliated mortgage lending firms. The Trust
was incorporated in Delaware in 1995. The
predecessors to the Trust were formed and managed by
Capital Alliance Advisors, Inc. ("CAAI"), which is
also the Manager of the Trust, and began making Home
Equity Loans in 1991 and 1995, respectively. As of
May 1, 1996, the Trust had a combined loan portfolio
of 59 Home Equity Loans, aggregating $4,757,895 in
principal amount with a Combined-Loan-to-Value Ratio
of 64.27%, and average loan size of $82,032, and an
average weighted yield of $13.43%. 51.92% of the
portfolio were first deeds of trust and 48.08% were
second deeds of trust.
The Trust also plans, with a portion of the proceeds
of this Offering to establish and conduct a wholesale
non-conforming residential mortgage banking business
specializing in B/C credit rated residential mortgage
loans which are originated in accordance with its
underwriting guidelines ("Mortgage Conduit
Business"). The REIT Provisions of the Code limit the
amount of capital which the Trust may invest in the
Mortgage Conduit Business to 5% of the value of the
Trust's total assets. On formation of the Mortgage
Conduit Subsidiary, CAAI will own all of the voting
common stock and a 1% economic interest in the
Mortgage Conduit Subsidiary. The Trust will own all
of the non-voting preferred stock representing 99% of
the economic interest in the Mortgage Conduit
Subsidiary. CAAI will have the power to elect all of
the directors of the Mortgage Conduit Subsidiary and
the ability to control the outcome of all matters for
which the consent of the holders of the common stock
of such subsidiary is required. The Mortgage Conduit
Business will be conducted either directly, through a
non-qualified REIT subsidiary, or indirectly through
a joint venture which may be with Sierra Capital
Acceptance ("SCA"), an affiliated company in which
the Trust holds a strategic investment or with an
unaffiliated third-party wholesale mortgage banking
firm. It is anticipated that the mortgage loans to be
originated or purchased by the Mortgage Conduit
Business initially will be packaged and sold in whole
loan sales at a premium to institutional investors
and ultimately may be securitized. Management
believes that the Trust's Mortgage Investment
Business will compliment its Mortgage Conduit
Business by providing it with a reliable investor for
a portion of its loan sales and that the Mortgage
Conduit Business will provide a continuing source of
Home Equity Loans to the Mortgage Investment
Business.
The Trust's principal sources of income from its
Mortgage Investment Business are the interest from
its investment portfolio of Home Equity Loans and the
fees associated with their origination. The Trust's
principal sources of income from its Mortgage Conduit
Business will be gains recognized on the sale of B-C
credit Mortgages ("B-C Mortgages"), the net spread
between interest earned on B-C
5
<PAGE> 10
mortgages and the interest charges associated with
borrowings used to finance such loans pending their
sale, and fees associated with their origination.
The Trust's principal executive office is 50
California Street, Suite 2020, San Francisco,
California 94111 (Telephone (415) 288-9575).
MANAGEMENT: Capital Alliance Advisors, Inc. ("Manager" and
"CAAI"), formed in 1989 in California, will oversee
the day-to-day operations of the Trust, subject to
the supervision of the Trust's Board of Directors and
pursuant to a Management Agreement (the "Management
Agreement") which will become effective on the
effective date of this Offering. The Manager employs
all of the personnel who conduct the Trust's Mortgage
Investment Business and will employ the personnel who
will conduct its Mortgage Conduit Business
subsidiary- unless such personnel are directly
employed by the Mortgage Conduit Business.
The Manager and its principals and officers, who are
also officers and directors of the Trust,
collectively have substantial experience in
originating, purchasing, financing, servicing and
investing in Home Equity Loans and B/C credit-rated
residential mortgages. Also, Messrs. Swartz and
Konczal collectively have extensive experience in the
management and operations of publicly-held REITs, in
real estate asset management and financing, and in
providing real estate investment advisory services as
a real estate investment fiduciary for both public
and private real estate investment companies and
REITs. The Manager is a licensed real estate broker
in California. (See "The Trust", "Management - The
Manager - Relationships with Affiliates").
The Manager will be entitled to receive as
compensation for its services to the Trust's Mortgage
Investment Business (1) a per annum Base Management
Fee payable monthly in arrears in an amount equal to
1% of the gross Mortgage assets plus 1/2% of cash or
equivalent assets of the Trust for general
supervisory, administrative and management services;
and (2) a per annum combined Loan Origination and
Loan Servicing Fee, payable monthly in an amount
equal to 2% of the Gross Mortgage Assets of the Trust
for loan origination and servicing services. All
origination "points" charged in connection with the
closing of Home Equity Loans (other than those
retained by the referring brokers) will be paid to
the Trust. The Manager and its principals will also
be entitled to receive certain miscellaneous fees (i)
from borrowers which are customarily payable in
connection with the origination and servicing of
mortgage loans; (ii) for other services requested by
the Trust pursuant to separate agreements approved by
the Board of Directors (such as property management
fees and real estate brokerage commissions in
connection with the management and disposition of
foreclosure property); and (iii) for services
rendered to the Mortgage Conduit Business. (See
"Management - The Manager".)
DISTRIBUTIONS AND The Trust's capital structure consists of both Series
DIVIDEND POLICY; A Preferred Shares ("Preferred Shares") and Common
DIVIDEND REINVESTMENT Shares. There are 643,730 Preferred Shares issued and
PLAN: outstanding and a maximum of 1,500,000 Common Shares
together with Warrants to purchase an additional
300,000 Common Shares may be issued in this offering
(See "Plan of Distribution"). There were no Common
Shares or Warrants outstanding prior to this
Offering.
The Preferred Shares , as a class, have a
non-cumulative preferential right to such
distributions as are declared each year. (See
"Summary of Organizational Documents and Securities -
"Distribution Preference".) The Distribution
6
<PAGE> 11
Preference is equal to an annualized return on the
Adjusted Net Capital Contributions of the Preferred
Shares which is equal to the lesser of 10.25 % or a
rate equal to 150 basis points over the Prime Rate or
the amount legally available for distribution by the
Trust. The Trust commenced payment of distribution to
the Preferred Shareholders on May 16, 1996 in an
amount equal to the current Distributions Preference
(which equals 9.75% of the Net Capital Contributions
attributable to the Preferred Shares ($9.50). It is
anticipated that such distributions will continue at
the same rate on a monthly basis. The holders of the
Common Shares, on a per share basis, are generally
entitled to the next such distributions up to an
amount equal to that paid to the holders of the
Preferred Shares, on a per share basis. The Trust, to
comply with the REIT Provisions of the Code, intends
to and must distribute 95% or more of its net taxable
income (which does not necessarily equal net income
as calculated in accordance with GAAP) to its
stockholders each year to comply with the REIT
provisions of the Code. Accordingly, Excess
Distributions on the Preferred and Common Shares will
be made at the end of each year if 95% of the Trust's
net taxable income has not theretofore been declared
as a Distribution and any Excess Distributions made
on a payment date generally will be allocated such
that the per share distributions to the Preferred
Shares and Common Shares for that payment date will
be the same per share.
The holders of Preferred Shares as a class will
receive all declared liquidating distributions
("Liquidating Distributions") until they have
recovered their entire Adjusted Net Capital
Contribution per Preferred Share as Liquidating
Distributions. The holders of Common Shares will as a
class be entitled to all subsequent Liquidating
Distributions until they have recovered their
Adjusted Net Capital Contribution per Common Share in
a similar manner. Any remaining Liquidating
Distributions generally will then be shared pro-rata
by the holders of Common Shares and Preferred Shares.
(See "Summary of Organizational Documents an
Securities" and "Distributions to Shareholders.")
Once the Minimum Subscription Level is reached and
the escrow conditions are met, Net Escrow Interest
will be paid to Common shareholders from escrow if
such Net Escrow Interest allocable to a Shareholder
is at least $10.00. Otherwise, the funds will be paid
to the Trust (although, in the case of shareholders
electing to participate in the Trust's Dividend
Reinvestment Plan, the interest earned, including
that exceeding $10.00, will be invested in additional
Common Shares) (See "Plan of Distribution".) After
the Trust has achieved the Minimum Subscription Level
the Trust intends to pay dividends on Common Shares
on at least a quarterly basis as determined by the
Directors. The Directors intend to adopt a dividend
policy which will provide for distributions per
Common Share at a rate approximately equivalent to
rates being paid by money market funds from the time
the Trust raises $500,000 (or such other amount as
may be approved by the NASD) until substantially all
of the capital contributions of investors are
invested in Home Equity Loans. The actual timing and
amount of dividends will be determined by the
Directors based on, among other things, the Trust's
earnings, cash flow, operations, and financial
condition.
The Trust's predecessors from December 1991 through
April 1996 paid 53 regular consecutive monthly
distributions to the Preferred Shareholders (formerly
Class "A" Shares of the Trust's predecessors) at
rates ranging from 10.50% to 11% of Net Capital
Contributions per Class "A" Share. Commencing May 16,
1996, the Trust began making distributions to
Preferred Shareholders at the rate of 9.75% of the
Net Capital Contribution per Preferred Share (the
current
7
<PAGE> 12
Distribution Preference) and has made consecutive
monthly distributions to the Preferred Shareholders
at such rate since that date. The Net Capital
Contribution per Preferred Share is $9.50. The Board
of Directors has not established an initial or
minimum distribution level for the Common Shares.
The Trust has adopted a Dividend Reinvestment Plan
("DRP") that allows shareholders who have enrolled in
the DRP to reinvest their dividends automatically in
Common Shares of the Trust. Until the termination of
the Initial Public Offering and the Common Shares
commence trading on NASDAQ-NMS, Shares acquired under
the DRP will be purchased directly from the Trust at
$9.60 per Share. After the Common Shares commence
trading on NASDAQ-NMS, the DRP will acquire
outstanding Common Shares in the open market to the
extent available. (See "Distributions and Dividend
Reinvestment Plan.")
<TABLE>
<S> <C>
THE OFFERING: Common Shares Offered by the Trust(1)..............................1,500,000 Shares
Common Stock to be Outstanding after
the Offering..........................................................50,000 Shares
(Minimum)
1,500,000 Shares
(Maximum)
Use of Proceed...............................................To provide funding for
Trust's Mortgage Investment Business,
for its planned Mortgage Conduit
Business and for general corporate purposes.
NASDAQ NMS Symbol(2).........................................................."CAIT"
</TABLE>
- --------
(1) Does not include up to 300,000 Common Shares reserved for issuance
upon exercise of Shareholder and Managing Dealer Warrants. Shareholder Warrants
to acquire up to 150,000 Common Shares have a 4 year term and Managing Dealer
Warrants to acquire up to 150,000 Common Shares have a 4 year term. (See
"Capitalization" and "Summary of Organizational Documents and Securities").
(2) Listing on NASDAQ National Market System is being applied for and
is pending.
8
<PAGE> 13
- -------------------------------------------------------------------------------
RISK FACTORS
- -------------------------------------------------------------------------------
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered before making an
investment in the Trust. This Prospectus contains forward-looking statements
which involve risks and uncertainties. The Trust's actual results could differ
materially from those anticipated in these forward-looking statement as a result
of certain factors, including those set forth in the following risk factors and
elsewhere in this Prospectus.
LENDING RISKS AND RELATED CONSIDERATIONS.
General. The lending business is subject to various business risks,
including, but not limited to, the following: the risk that borrowers will not
satisfy their debt service payments; the risk that appraisals of property
securing loans originated or purchased by the Trust will not reflect the
property's actual value, either due to valuation errors or fluctuations in the
value of real estate and that, upon liquidation of real estate owned or
properties securing loans, the Trust may suffer a loss; and the risk that
changes in interest rates after the origination of a loan and prior to the sale
of such loan may narrow the spread between the variable interest rates the Trust
will pay in its planned Mortgage Conduit Business pursuant to loans that are
warehoused pending their sale (i.e., pledged to lenders as collateral for
short-term lines of credit or warehouse lines) and the interest rates paid by
borrowers. A decrease in interest rates also could cause an increase in the rate
at which outstanding loans are prepaid. In addition, with respect to Home Equity
Loans that are second mortgage loans, the Trust's security interest in the
property securing its loan is subordinated to the interest of a first mortgage
lender. If the value of the property securing a second mortgage loan is not
sufficient to repay the borrower's obligation to the first mortgage holder upon
foreclosure, there will be no realizable value in such property to satisfy the
borrower's obligation to the Trust. Similarly, if the value of the property
securing a mortgage loan declines sufficiently over time, the realizable value
in such property may be less than the borrower's obligation to the Trust. All or
any one of the foregoing business risks could have an adverse effect on the
Trust's operations.
The Trust's Mortgage Investment Business may be adversely affected by
periods of economic slowdown or recession which may be accompanied by decreased
demand for consumer credit and declining real estate values. Any material
decline in real estate values reduces the ability of borrowers to use home
equity to support borrowings and increases the loan-to-value ratios of loans
previously made by the Trust, thereby weakening collateral coverage and
increasing the possibility of a loss in the event of default. Further,
delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. Because of the Trust's focus on borrowers who have
tarnished credit and who are unable or unwilling to obtain mortgage financing
from conventional mortgage sources ("Non-conventional Borrowers"), the actual
rates of delinquencies, foreclosures and losses on such loans could be higher
under adverse economic conditions than those currently experienced in the
conforming mortgage lending industry in general. Also, any sustained period of
such increased delinquencies, foreclosures or losses could adversely affect the
pricing of the Trust's whole loan sales in its planned Mortgage Conduit
Business. In the course of its business, the Trust may acquire properties
securing loans that are in default. Also, there is a risk that hazardous or
toxic waste could be found on such properties. In such event, the Trust could be
held responsible for the cost of cleaning up or removing such waste, and such
cost could exceed the value of the underlying properties.
Loans made to Non-conventional Borrowers may entail a higher risk of
delinquency and higher losses than loans made to borrowers who utilize
conventional mortgage sources. While many non-conforming lenders will accept
loans with a Combined Loan-to-Value Ratio of 90% or more, the Trust believes
that the underwriting criteria it employs, (particularly the maximum of 75%
Combined Loan-to-Value Ratio of its Home Equity Loans and the 90% Test applied
to all loans) are conservative and enable it to mitigate the higher risks
inherent in loans made to Non-conventional Borrowers. However, no assurance can
be given that such criteria or methods will afford adequate protection against
such risks. In connection with its planned Mortgage Conduit Business, the Trust
plans to engage in bulk whole loan sales. While the pools of loans sold by the
Trust in its Mortgage Conduit Business will generally be sold on a non-resource
basis with respect to economic interest and rate risk, such bulk whole loan
sales will generally be made pursuant to agreements that provide for recourse by
the purchaser against the Trust's Mortgage Conduit Business in the event of a
breach of any representation or warranty made by the Trust's Mortgage Conduit
Business, any fraud or misrepresentation during the mortgage loan origination
process or upon early default on such mortgage loans. The Trust's Mortgage
Conduit Business will generally try to limit the remedies of such purchasers to
the remedies the Trust's Mortgage Conduit Business receives from the persons
from whom the Trust's Mortgage Conduit Business purchases such mortgage loans.
However, in some cases, the remedies available to a purchaser
9
<PAGE> 14
of mortgage loans may be broader than those available to the Trust's Mortgage
Conduit Business against its seller, and should a purchaser exercise its
remedies and rights against it, the Mortgage Conduit Business may not always be
able to enforce whatever remedies it may have against its sellers.
In the ordinary course of its business, the Trust is also subject to
claims made against it by borrowers arising from, among other things, losses
that are claimed to have been incurred as a result of alleged breaches of
fiduciary obligations, misrepresentations, errors and omissions of employees,
officers and agents of the Trust (including its appraisers), incomplete
documentation and failures by the Trust to comply with various laws and
regulations applicable to its business. The Trust believes that any claims
asserted in the future could result in legal expenses or liabilities which could
have a material adverse effect on the Trust's results of operations and
financial condition.
Competition and Demand for Non-Conforming Mortgage Loans. The
availability of mortgage loans meeting the Trust's criteria is dependent upon,
among other things, the size of and level of activity in the residential real
estate in either its Mortgage Investment Business or its Mortgage Conduit
Business lending market and, in particular, the demand for non-conforming
mortgage loans. The size and level of activity in the residential lending market
depend on various factors, including the level of interest rates, regional and
national economic conditions and inflation and deflation in residential property
values, as well as the general regulatory and tax environment as it relates to
mortgage lending. (See "Business -- Regulation.") To the extent the Trust is
unable to obtain sufficient mortgage loans meeting its criteria, the Trust's
businesses will be adversely affected.
In general, lower interest rates prompt greater demand for mortgage
loans, because more individuals can afford to purchase residential properties,
and refinancing and second mortgage loan transactions increase. However, if low
interest rates are accompanied by a weak economy and high unemployment, demand
for housing and residential mortgage loans may decline. Conversely, higher
interest rates and lower levels of housing finance and refinance activity may
decrease mortgage loan purchase volume levels, resulting in decreased economies
of scale and higher costs per unit, reduced fee income, smaller gains on the
sale of non-conforming mortgage loans and lower net income during the
accumulation phase.
Although the Trust intends to seek geographic diversification throughout
the Western United States of the properties underlying the Trust's mortgage
loans held in the Mortgage Investment Business, it does not intend to set
specific limitations on the aggregate percentage of its portfolio composed of
such properties located in any one area (whether by state, zip code or other
geographic measure). Concentration in any one area will increase exposure of the
Trust's portfolio to the economic and natural hazard risks associated with such
area. The Trust expects that the percentage of its assets secured by properties
in California and held by the Trust in its Mortgage Investment Business as whole
loans will constitute its greatest concentrations of such loans secured by
properties located in any state. Home Equity Loans currently held in the
Mortgage Investment Business are concentrated primarily in San Diego county and
the San Francisco Bay Area.
Dependence on Independent Mortgage Loan Brokers. The Trust, through its
Manager, depends largely on independent mortgage loan brokers, financial
institutions and mortgage bankers for its originations and purchases of mortgage
loans in both its Mortgage Investment Business and its planned Mortgage Conduit
Business. The Trust's competitors also seek to establish relationships with such
independent mortgage brokers, financial institutions and mortgage bankers, none
of whom is contractually obligated to continue to do business with the Trust.
Changes in Interest Rates. Profitability may be directly affected by the
level of and fluctuations in interest rates which affect the Trust's ability to
earn a spread between interest received on its loans held for investment and its
cost of capital in its Mortgage Investment Business or for loans held for sale
in its planned Mortgage Conduit Business and rates paid on warehouse lines. A
substantial and sustained increase in interest rates could adversely affect the
Trust's ability to originate and purchase loans. A significant decline in
interest rates could increase the level of loan prepayments. Such losses could
be magnified if the Trust's Mortgage Conduit Business were to securitize its
loans. Substantially all variable rate mortgages to be originated or purchased
by the Trust, either in its Mortgage Investment or Conduit Business will include
a "teaser" rate, i.e., an initial interest rate significantly below the fully
indexed interest rate at origination. Although these loans are underwritten at
the fully indexed rate at origination, borrowers may encounter financial
difficulties as a result of increases in the interest rate over the life of the
loan.
10
<PAGE> 15
BUSINESS RISKS AND RELATED CONSIDERATIONS.
Competing Mortgage Banking Firms. As a marketer of mortgage loans, the
Trust faces intense competition, primarily from mortgage banking companies,
commercial banks, credit unions, thrift institutions, finance companies and
other private lenders. Many of these competitors are substantially larger and
have more capital and other resources than the Trust. Competition can take many
forms, including convenience in obtaining a loan, customer service, marketing
distribution channels and loan pricing. Furthermore, the current level of gains
being realized in the mortgage banking industry on the sale of the type of loans
the Trust's Mortgage Conduit Business plans to originate and purchase is
attracting and may continue to attract additional competitors into this market
with the possible effect of lowering gains that may be realized on the Trust's
Mortgage Conduit Business loan sales. Competition may be affected by
fluctuations in interest rates and general economic conditions. During periods
of rising rates, competitors which have locked in low borrowing costs may have a
competitive advantage. During periods of declining rates, competitors may
solicit the Trust's customers to refinance their loans. (See "Business -
Competition").
Limited History of Independent Operations. The Trust through its
predecessors commenced operations in January 1991. Although the Trust's
predecessors and the Trust have been profitable for each year since inception
and have experienced growth in mortgage loan originations and total revenues
relative to prior years, there can be no assurance that the Trust will be
profitable in the future or that these rates of growth will be sustainable or
are indicative of future results.
While the loans originated and purchased by the Trust to date have been
outstanding for a relatively short period of time, the favorable loss experience
of the Trust's loans to date may not be indicative of future results. However,
as the Trust extends the maturities of its mortgage loans to up to 15 years, the
Manager believes that the Trust will be able to maintain or improve the loan
loss ratio at its present level as the portfolio becomes more seasoned and
maturities extended.
Future Revisions in Policies and Strategies at the Discretion of the
Board of Directors. The Board of Directors has established the investment
policies and operating policies and strategies set forth in this Prospectus as
the investment policies and operating policies and strategies of the Trust.
However, any of the policies, strategies and activities described in this
Prospectus may be modified or waived by the Board of Directors, without
stockholder consent. The Board of Directors may amend the Trust's Bylaws without
stockholder consent.
Planned Expansion. The Trust's growth to date is primarily due to
increased mortgage origination activities as its capital base has expanded. The
Trust intends to continue to pursue a growth strategy for the foreseeable future
in both its Mortgage Investment Business and its planned Mortgage Conduit
Business. Such expansion and its operating results will depend on the Trust's
ability to expand its mortgage origination, purchasing and sales activities. The
Trust plans to continue its loan origination growth in its Mortgage Investment
Business by expanding its lending area, through CAAI's expansion of its
cooperating broker network, and establishment of correspondent relationships and
through loan originations and purchases from its planned Mortgage Conduit
Business. The establishment of the Mortgage Conduit Business will also require
either the establishment of a joint venture with or acquisition of a wholesale
mortgage firm or the establishment of such a firm. Each of these alternatives
will require additional personnel and assets and the establishment of expanded
loan broker and loan correspondent networks. Although the Manager's principals
have previously established similar operations in SCA and SCA is currently
operating at a profitable level, there can be no assurance that the Trust and
its Manager will be able to successfully expand and operate such ventures,
programs and networks profitably. There can be no assurance that the Trust will
anticipate and respond effectively to all of the changing demands that its
expanding operations will have on the Trust's management, information and
operating systems, and the failure to adapt its systems could have a material
adverse effect on the Trust's result of operations and financial condition.
There can be no assurance that the Trust will successfully achieve its planned
expansion or, if achieved, that the expansion will result in profitable
operations.
Limited Liability of Directors and Indemnification. The Directors are
directors of a Delaware corporation, and, as such, are required to perform their
duties with respect to the Trust's business in good faith, and in a manner
believed by the Directors to be in the best interests of the Trust. Pursuant to
the Delaware General Corporation Law, the Directors are not personally liable to
any person, other than the Trust or a Shareholder, for any act, omission or
obligation of the Trust or any director thereof, except for liability arising
from his own willful misfeasance, bad faith, gross negligence or disregard of
duty. The Trust's officers, employees and agents are also required to act in
good faith and in a manner believed by them to be in the best interests of the
Trust in handling its affairs.
11
<PAGE> 16
The Directors intend to obtain insurance at Trust expense in reasonable
amounts and to the extent that it is available at economical costs, against
losses arising from tort claims or other claims that may be made against a
Director, officer, employee or other agent of the Trust. Under its Certificate
of Incorporation and individual indemnification agreements, the Trust will
indemnify its Directors, officers and employees; and will indemnify the Manager
and its Affiliates against all liabilities incurred in connection with their
serving in such capacities. Generally, any director, officer or employee and the
Manager and its Affiliates will be entitled to indemnification, unless it is
determined that its or their conduct was in violation of law, was deliberately
dishonest, or constitutes willful misconduct. Other agents of the Trust may be
indemnified on the same basis in the discretion of the Directors in the specific
case. The Trust intends to enter into contracts which provide indemnity to its
Directors and officers and agents, including the Manager, as permitted by the
Certificate of Incorporation. Such indemnification provisions do not affect the
availability of equitable remedies, such as the rescission of an improper
contract or an injunction to prevent a threatened action. Shareholders,
accordingly, would be entitled to more limited rights of action than they will
have absent the Certificate of Incorporation's limitations of Directors',
officers' and agents' liability and such indemnification agreements.
No Prior Public Market For Common Stock. Prior to this Offering, there
has been no public market for the Common Stock of the Trust. Although the Trust
intends to apply for listing of the Common Stock on the NASDAQ National Market
System, there can be no assurance that an active public trading market for the
Common Stock will develop after the Offering or that, if developed, it will be
sustained. The public offering price of the Common Stock offered hereby has been
determined by negotiations between the Trust and the Managing Broker Dealer and
may not be indicative of the price at which the Common Stock will trade after
the Offering. (See "Plan of Distribution"). Consequently, there can be no
assurance that the market price for the Common Stock will not fall below the
initial public offering price.
Possible Volatility of Stock Price; Effect of Future Offerings on Market
Price of Common Stock. The market price of the Common Stock may experience
fluctuations that are unrelated to the Trust's operating performance. In
particular, the price of the Common Sock may be affected by general market price
movements as well as developments specifically related to the consumer finance
industry such as, among other things, interest rate movements.
The Trust may increase its capital by making additional private or public
offerings of its Common Stock, securities convertible into its Common Stock,
preferred stock or debt securities. The actual or perceived effect of such
offerings, the timing of which cannot be predicted, may be the dilution of the
book value or earnings per share of the Common Stock outstanding, which may
result in the reduction of the market price of the Common Stock.
Dividend Preferences. The Preferred Shares are entitled to the Current
Distribution Preference each quarter. In order to permit the concurrent payment
of Current Distributions on both Common Shares and Preferred Shares, the Trust,
assuming sufficient funds are available, intends to declare a dividend on the
Preferred Shares equal to the Current Distribution Preference for the entire
quarter before declaring or paying any dividends on the Common Shares. This
declaration will have the effect of creating a liability of the Trust based on
the number of Preferred Shares than outstanding. This liability will reduce the
amount otherwise legally available for distributions on the Common Shares. The
Trust anticipates, however, that this action will not have the effect of
actually limiting the amount of distributions to be declared and paid on the
Common Shares, since it is also anticipated that it will have sufficient funds
available for, and be able to legally declare and pay, those distributions,
although non assurance can be given in this regard.
The Preferred Shares are also generally entitled to specified preferences
with respect to any declared Liquidating Distributions. Those distributions will
not be made to the holders of Common Shares unless Preferred Share preferences
have been satisfied, and those preferences therefore, could delay or permanently
preclude the Common Shares' receipt of those distributions. (See "Summary of
Organizational Documents and Securities").
Although the Certificate of Incorporation creates the above-described
preferences for shareholders, the shareholders are entitled to those preferences
only to the extent that dividends are actually declared by the Directors. No
rights will accrue to shareholders as a result of the failure of the Directors
to declare dividends in the amount of their preferences.
12
<PAGE> 17
TAX AND REGULATORY RISKS AND RELATED CONSIDERATIONS.
Consequences of Failure to Maintain REIT Status; Trust Subject to Tax as
a Regular Corporation. In order to maintain its qualification as a REIT for
federal income tax purposes, the Trust must continually satisfy certain tests
with respect to the sources of its income, the nature and diversification of its
assets, the amount of its distributions to stockholders and the ownership of its
stock.
Since commencement of its operations, the Trust has operated and in the
future intends to operate so as to qualify as a REIT for federal income tax
purposes. To qualify as a REIT, the Trust must satisfy a series of complicated
tests related to the nature of its assets and income and it must also distribute
substantially all of its income (as special defined for these purposes) to its
stockholders. If the Trust fails to qualify as a REIT in any taxable year and
certain relief provisions of the Code do not apply, the Trust would be subject
to federal income tax as a regular, domestic corporation, and its stockholders
would be subject to tax in the same manner as stockholders of such corporation.
Distributions to stockholders in any year in which the Trust fails to qualify as
a REIT would not be deductible by the Trust in computing its taxable income. As
a result, the Trust could be subject to income tax liability, thereby
significantly reducing or eliminating the amount of cash available for
distribution to its stockholders. Further, the Trust could also be disqualified
from re-electing REIT status for the four taxable years following the year
during which it become disqualified.
No assurance can be given that future legislation, regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to the Trust's qualification as a REIT or the federal
income tax consequences of such qualification. (See "Federal Tax
Considerations").
Regulation of Lending Activities and Changing Regulatory Environment. The
operations of the Trust are subject to extensive regulation by federal, state
and local governmental authorities and are subject to various laws and judicial
and administrative decisions imposing various requirements and restrictions,
including among other things, regulating credit granting activities,
establishing maximum interest rates, insurance coverages and charges, requiring
disclosures to customers, governing secured transactions and setting collection,
repossession and claims handling procedures and other trade practices. Although
the Trust believes that its Mortgage Investment Business is in compliance in all
material respects with applicable local, state and federal laws, rules and
regulations, and that its planned Mortgage Conduit Business will conduct its
business in the same manner, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future which could make
compliance much more difficult or expensive, restrict the Trust's ability in its
separate businesses to originate or sell loans, further limit or restrict the
amount of interest and other charges earned under loans originated or purchased
by the Trust, or otherwise adversely affect the business or prospects of the
Trust. (See "Business - Regulation").
Also, members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Trust's loans are made to borrowers for
the purpose of consolidating consumer debt or financing other consumer needs,
the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Trust.
The Trust anticipates that its loan originations and purchases, other
that short-term Home Equity Loans in its Mortgage Investment Business, will be
primarily variable rate mortgage loans which do not carry the inherent interest
rate risk of fixed-rate loans. As the Trust's production of fixed-rate mortgage
loans increases, the Trust will implement various hedging strategies. Future
hedging transactions may include short and forward selling of U.S. Treasury
securities, forward sales of mortgage loans, interest rate caps and floors and
buying and selling of futures and options on futures. The nature and quantity of
hedging transactions are determined by the Trust's management based on various
factors, including market conditions and the expected volume of mortgage loan
originations and purchases. No assurance can be given that such hedging
transaction will offset the risks of changes in interest rates, and it is
possible that there will be periods during which the Trust could incur losses
after accounting for its hedging activities. (See "Business - Hedging").
13
<PAGE> 18
Investment Company Act Risk. The Trust at all times intends to conduct
its business so as not to become regulated as an investment company under the
Investment Company Act. Accordingly, the Trust does not expect to be subject to
the restrictive provisions of the Investment Company Act. The Investment Company
Act exempts entities that are "primarily engaged in the business of purchasing
or otherwise acquiring mortgages and other liens on and interests in real
estate" ("Qualifying Interest"). Under the current interpretation of the staff
of the Commission, in order to qualify for this exemption, the Trust must
maintain at least 55% of its assets directly in mortgage loans, and certain
other Qualifying Interests in real estate. The Trust does not intend to invest
in or issue mortgage securities with respect to an underlying pool of mortgages,
mortgage securities which would not qualify as Qualifying Interests for purposes
of the 55% requirement. If the Trust fails to qualify for exemption from
registration as an investment company, its ability to use leverage in its
Mortgage Investment Business would be substantially reduced, and it would be
unable to conduct its business as described herein. Any such failure to qualify
for such exemption could have a material adverse effect on the Trust.
FINANCING RISKS AND RELATED CONSIDERATIONS.
Availability of Funding Sources; Financing Risks. Financial service
companies like the Trust have a constant need for capital to finance their
lending activities. The Trust's planned Mortgage Conduit Business will fund the
majority of its loan origination and purchasing activities by selling
substantially all of the loans it originates and purchases to institutional
investors and by borrowing on warehouse lines of credit secured by pledges of
its loans, in most cases until the pledged loans are sold and the lenders
repaid. Accordingly, any substantial reduction in the size of the secondary
markets for the Mortgage Conduit Business loans could have a material adverse
effect on the Mortgage Conduit Business operations.
While the Trust expects to be able to obtain financing for its Mortgage
Conduit Business, there can be no assurance that financing will be obtainable on
favorable terms. To the extent that the Mortgage Conduit Business is not
successful in selling its loans into the secondary markets for such loans or in
arranging new financing, it may have to curtail its loan origination and
purchasing activities, which could have a material adverse effect on its
operations.
The REIT Provisions of the Code require the Trust to distribute to its
stockholders substantially all of the its net earnings. As a result, such
provisions restrict the Trust's ability to retain earnings and replenish the
capital committed to its business activities. The REIT provisions of the Code
also limit the amount of capital which the Trust may invest in its planned
Mortgage Conduit Business up to 5% of the value of the Trust's total assets. The
Trust will take measures to prevent the value of its planned investment in the
Mortgage Conduit Business to exceed 5% of the value of the Trust's assets at the
end of each calendar quarter. (See "Federal Tax Considerations").
It is expected that reverse repurchase agreements or a secured line of
credit will be the principal financing devices utilized by the Trust to leverage
its mortgage loan portfolio. A reverse repurchase agreement, although structured
as a sale and repurchase obligation, acts as a financing under which the Trust
effectively pledges its mortgage loans as collateral to secure a short-term
loan. Generally, the other party to the agreement will make the loan in an
amount equal to a percentage of the market value of the pledged collateral. At
the maturity of the reverse repurchase agreement, the Trust is required to repay
the loan and correspondingly receives back its collateral. Under reverse
repurchase agreements, the Trust may retain the incidents of beneficial
ownership, including the right to interest paid on the collateral. Upon a
payment default under such agreements, the lending party may liquidate the
collateral. The Trust expects that its borrowing agreements will require the
Trust to pledge cash or additional mortgage loans in the event the market value
of existing collateral declines. To the extent that cash reserves are
insufficient to cover such deficiencies in collateral, the Trust may be required
to sell assets to reduce the borrowings.
The use of reverse repurchase agreements by lenders in the event of the
insolvency or bankruptcy of the Trust, among other things, allows the creditor
under such agreements to avoid the automatic stay provisions of the Bankruptcy
Code and to foreclose on the collateral agreements without delay. In the event
of the insolvency or bankruptcy of a lender during the term of a reverse
repurchase agreement, the lender may be permitted, under the Bankruptcy Code, to
repudiate the contract, and the Trust's claim against the lender for damages
therefrom may be treated simply as one of the unsecured creditors. In addition,
if the lender is a broker or dealer subject to the Securities Investor
Protection Act of 1970, the Trust's ability to exercise its rights to recover
its loans under a reverse repurchase agreement or to be compensated for any
damages resulting from the lender's insolvency may be further limited by such
statute rather than the Bankruptcy Code. The effect of these various statutes
is, among other thing, that a bankrupt lender, or its conservator or receiver,
may be permitted to repudiate
14
<PAGE> 19
or disaffirm its reverse repurchase agreements, and the Trust's claims against
the bankrupt lender for damages resulting therefrom may be treated simply as one
of an unsecured creditor. Should this occur, the Trust's claims would be subject
to significant delay and, if and when received, may be substantially less than
the damages actually suffered by the Trust.
To reduce its exposure to the credit risk of reverse repurchase agreement
lenders, the Trust will not only limit the amount of financing to 20% of its Net
Capital Contributions, but it also intends to enter into such agreements with
several different parties to reduce credit exposure. The Trust will monitor the
financial condition of its reverse repurchase agreement lenders on a regular
basis, including the percentage of mortgage loans that are the subject of
reverse repurchase agreements with a single lender. Notwithstanding these
measures, no assurance can be given that the Trust will be able to avoid such
third party risks.
CONFLICTS OF INTEREST AND RELATED CONSIDERATIONS.
Relationships with CAAI and its Affiliates; Conflicts of Interest. The
Trust is subject to conflicts of interest arising from its relationship with its
Manager, CAAI and its affiliates. The Trust will have five Directors, three of
whom are principals of the Manager and one of whom is the president of the
Managing Dealer. The Directors and the Manager will have sole discretion and
authority to manage the affairs of the Trust. The Manager and its principals
manage a private mortgage investment fund which has similar investment criteria
to those of the Trust and with which the Trust may participate in connection
with non-conforming mortgage loans. They also may engage in other business
activities, investments or ventures, independently or with others, and are not
obligated to devote all of their time to the Trust's affairs. In the event of
the resignation or dissolution of the Manager or all of the Directors, the Trust
would continue and the Shareholders would be entitled to elect successor
Directors who could, in turn, retain a new Manager. (See "Summary of
Organizational Documents and Securities"). The success of the operation of the
Trust depends in large part upon the services and knowledge of officers and
directors of Capital Alliance Advisors, Inc. The loss of one or more of certain
of those officers' services for any reason could have a material adverse effect
on the Trust. The Trust will carry key man insurance for CAAI on the lives of
Messrs. Swartz, Thompson and Konczal. If their services become unavailable for
any reason, it may be difficult or impossible for the Trust to find a suitable
replacement.
CAAI through its affiliation with Sierra Capital Companies and its
affiliates, also has interests that may conflict with those of the Trust in
fulfilling certain duties. (See "Management - the Manager"). In addition,
Messrs. Swartz, Thompson and Konczal, the officers and Directors of CAAI are
also officers and Directors of the Trust. (See "Management: Directors and
Executive Officers"). The Officers and Directors of CAAI are also involved in
other businesses which may generate profits on other compensation. The Trust
will not share in such compensation. The Trust will rely upon CAAI to provide
management, loan origination and loan servicing services to the Trust for the
day-to-day operations of its business. CAAI will have approximately 7 employees
on the effective date of this Offering who are engaged in the management and
operations of the Trust's Mortgage Investment Business. No assurance can be
given that the Trust's relationships with CAAI and its affiliates will continue
indefinitely. The failure or inability of CAAI to provide the services required
of it under the Management Agreement or its Loan Origination and Loan Servicing
Agreement or any other agreements or arrangements with the Trust would have a
material adverse effect on the Trust's business. In addition, as the holder of
all of the outstanding voting stock of the planned Mortgage Conduit Business,
CAAI will have the right to elect all directors of the Mortgage Conduit
Subsidiary and the ability to control the outcome of all matters for which the
consent of the holders of the common stock of the Mortgage Conduit Subsidiary is
required. (See "Business - Mortgage Conduit Business").
It is the intention of the Trust and CAAI that any agreements and
transactions, taken as a whole, between the Trust, on the one hand, and CAAI or
its affiliates, on the other hand, are fair to both parties. However, there can
be no assurance that each of such agreements or transactions will be on terms at
least as favorable to the Trust as could have been obtained from unaffiliated
third parties. (See "Business - Management and The Manager" and "Relationships
with Affiliates").
The President of the Managing Dealer serves as a Director of the Trust
(See "Management - Directors and Officers"). The Managing Dealer is subject to
certain obligations and responsibilities in connection with the offering of the
Shares. It is the Managing Dealer's intention that it will fulfill these
obligations and responsibilities although there can be no assurance that it will
do so as rigorously as would be the case if its president did not serve as a
Director of the Trust.
15
<PAGE> 20
Lack of Separate Representation. Wilson, Ryan and Campilongo of San
Francisco is acting as counsel to both the Trust and the Manager, and, as such,
has rendered legal services with respect to certain Trust matters. Wilson, Ryan
and Campilongo is also counsel to certain Affiliates of the Manager. Wilson,
Ryan and Campilongo is now furnishing, and may in the future furnish, legal
services to other entities and the Trust, which are sponsored by the Manager or
its Affiliates. In the event that a conflict of interest should develop, the
Manager will cause the entities with conflicting interest to engage separate
counsel. No separate counsel has been retained to represent the interest of
shareholders in connection with this offering.
16
<PAGE> 21
- -------------------------------------------------------------------------------
THE TRUST
- -------------------------------------------------------------------------------
The Trust is a specialized mortgage banking firm engaged in the business
of originating, purchasing, and servicing collateral-oriented, high-yielding
non-conforming residential mortgages, consisting primarily of Home Equity Loans
(the "Mortgage Investment Business"). Home Equity Loans are primarily made to
borrowers with impaired credit who own single-family residences or two-to-four
unit residential properties with relatively low combined loan-to-value ratios
for the purposes of debt consolidation, business, home improvements and a
variety of other purposes.
The Trust was incorporated in Delaware on December 12, 1995 and is the
successor entity of a consolidation effective as of April 30, 1996 of Capital
Alliance Income Trust I ("CAIT I") and Capital Alliance Income Trust II ("CAIT
II"), which were Delaware business trusts formed in 1991 and 1994, respectively.
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations"). Both CAIT I and CAIT II were managed by CAAI, the Manager of the
Trust. The consolidation of CAIT I and CAIT II into the Trust was effected after
a "fairness" hearing conducted by the California Corporations Commissioner, the
issuance of a permit by the California Commissioner of Corporations qualifying
the issuance of the Trust's Preferred Shares in the consolidation, and the
approval of the consolidation by the shareholders of both CAIT I and CAIT II.
The Trust intends to operate in a manner that permits the Trust to elect,
and it intends to elect, to be a REIT for federal income tax purposes. The Trust
expects to generate income for distribution to its stockholders primarily from
the net interest and origination income derived from its Mortgage Investment
Business and dividend income from the operation of its Mortgage Conduit
Business. As a result of its REIT status, the Trust will be permitted to deduct
dividend distributions to stockholders in calculating its taxable income,
thereby effectively eliminating the "double taxation" that generally results
when a corporation earns income and distributes that income to stockholders in
the form of dividends. The Trust and its Mortgage Investment Business generally
will not be subject to federal income tax to the extent that certain REIT
qualifications are met. The Trust's Mortgage Conduit Business, which will be
conducted either directly through a non-qualified REIT subsidiary ("Mortgage
Conduit Business") or indirectly through a joint venture, will not be
consolidated with the Trust and its Mortgage Investment Business for accounting
purposes because, pursuant to the REIT Provisions of the Internal Revenue Code,
the Trust will not own any of the Mortgage Conduit Business' voting common stock
and the Trust will not control the Mortgage Conduit Business. On formation of
the Mortgage Conduit Subsidiary, CAAI will own all of the voting common stock
and a 1% economic interest in the Mortgage Conduit Subsidiary. The Trust will
own all of the non-voting preferred stock representing 99% of the economic
interest in the Mortgage Conduit Subsidiary. CAAI will have the power to elect
all of the directors of the Mortgage Conduit Subsidiary and the ability to
control the outcome of all matters for which the consent of the holders of the
common stock of such subsidiary is required. Additionally, the REIT Provisions
of the Code limit the amount of capital which the Trust may invest in its
planned Mortgage Conduit Business to 5% of the value of the Trust's total
assets. All taxable income of the Mortgage Conduit Business is subject to
federal and state income taxes, where applicable. See "Federal Income Tax
Considerations."
The principal executive offices of the Trust are located at 50 California
Street, San Francisco, California 94111, telephone (415) 288-9575.
The Manager, Capital Alliance Advisors, Inc., will, pursuant to the
Management Agreement and the Loan Origination and Servicing Agreement, oversee
the day-to-day operations of the Trust, subject to the supervision of the
Trust's Board of Directors. The Manager will be involved in three primary
activities: (1) asset-liability management - the analysis and oversight of the
acquisition, financing and disposition of Trust assets; (2) capital management -
primarily the oversight of the Trust's structuring, analysis, capital raising
and investor relations activities; and (3) operations - the providing of the
management, personnel, assets and systems of the Trust's operating division -
the Mortgage Investment Business. The Mortgage Conduit Business will be operated
by the Manager pursuant to separate agreements which will be entered into,
depending on the form of organization selected for that entity. The Manager has
employed personnel who have significant experience in mortgage finance and in
the origination, purchase and administration of mortgage assets. See "Manager
Management Agreement."
17
<PAGE> 22
- -------------------------------------------------------------------------------
ESTIMATED USE OF PROCEEDS
- -------------------------------------------------------------------------------
Capital Alliance Income Trust intends to invest the net proceeds of this
offering primarily in Home Equity Loans and other non-conforming residential
mortgage loans in its Mortgage Investment Business and in its Mortgage Conduit
Business. It is anticipated that the net proceeds of this offering will be
received over a period of twelve months and that approximately 5% of such
proceeds will be invested in the Mortgage Conduit Subsidiary with the balance
being invested in the Mortgage Investment Business and for general corporate
purposes. To the extent that the Trust does not immediately so invest those
proceeds, they will be invested temporarily in short-term financial instruments
and deposits. (See "Investment Policy.")
Although its manager is continually reviewing its pipeline of
applications for Home Equity Loans, the Trust has not specifically identified
any Home Equity Loans or other mortgage loans in which to invest the proceeds of
this Offering.
The following table reflects the intended initial application from the
sale of the Shares and the exercise of the Warrants being offered hereby.
<TABLE>
<CAPTION>
Assuming 50,000 Assuming 1,500,000
Shares Sold and No Shares Sold and No
Warrants Exercised Warrants Exercised(3)
------------------ ---------------------
Amount % Amount %
<S> <C> <C> <C> <C>
Gross Proceeds of Offering ......................... $500,000 100.0% $15,000,000 100.0%
Less:
Expenses of Offering(4) (5)............ $50,000 10% $ 1,500,000 10%
Amount Available for Investment:
Reserves and Operations ............... $450,000 90% $13,500,000 90%
</TABLE>
- ---------------------------
(3)If 1,500,000 Shares are sold, a total of 150,000 Shareholder
Warrants and 150,000 Managing Dealer Warrants will be issued. The exercise of
all Shareholder and Managing Dealer Warrants will increase the gross proceeds to
the Trust from $15,000,000 to$17,400,000. "Proceeds to the Trust" (gross
proceeds less a commission of $0.25 per Shareholder Warrant exercised) will
increase to $15,112,500. If less than all Shareholder and Managing Dealer
Warrants are exercised, these amounts will correspondingly decrease. Shareholder
and Managing Dealer Warrants issued in connection with the purchase of Shares by
shareholders in the Initial Public Offering will not be exercisable until a date
two to four years from the date of this Prospectus). (See "Plan of Distribution"
and "Summary of Organizational Documents and Securities.")
(4)These amounts include expenses for marketing and offering services.
(See "Plan of Distribution"). This reimbursement is limited to $0.40 per Share
for each Share sold.
(5)All retail sales commissions in the Initial Public Offering will be
the obligation and responsibility of the Trust. Selected Selling Agents may
receive retail commission of $0.25 per Share for each Share sold pursuant to the
exercise of Shareholders Warrants, provided such sales are facilitated by them
and specified conditions are met. (See "Plan of Distribution").
18
<PAGE> 23
- -------------------------------------------------------------------------------
SOURCES OF ADDITIONAL FUNDS
- -------------------------------------------------------------------------------
The Trust may seek the following sources for funds for investment or
other Trust purposes: (i) the issuance of convertible or other debt, (ii) the
receipt of additional capital contributions through the sale of additional
Common Shares and Preferred Shares; and (iii) the receipt of additional capital
contributions through the exercise of Warrants.
The Trust's Bylaws authorize the Trust to issue additional Preferred
Shares or Common Shares (which would require shareholder approval by class of an
amendment of the Trust's certificate of incorporation to increase its authorized
capital) and to borrow funds from institutional lenders, banks and other lenders
through the issuance of commercial paper, notes, debentures, bonds and other
debt obligations (which may be convertible into Preferred Shares or Common
Shares or have attached Warrants to acquire Preferred Shares or Common Shares).
The Trust will not issue any debt securities to the public unless the historical
or substantiated future cash flow of the Trust, excluding extraordinary items,
is sufficient to cover the interest on those securities. (See Special Factors:
"Trust Considerations and Potential Dilution.")
19
<PAGE> 24
- -------------------------------------------------------------------------------
DISTRIBUTIONS AND DIVIDEND POLICY; DIVIDEND REINVESTMENT PLAN
- -------------------------------------------------------------------------------
DISTRIBUTION PREFERENCES.
Current Distribution and Liquidating Distributions will be made by the
Trust to holders of Common Shares and Preferred Shares in accordance with the
preferences set forth under "Summary of Organizational Documents and
Securities."
DURING OFFERING PERIOD.
After the Minimum Subscription Level of $500,000 (or such other amount as
may be approved by the NASD) is reached and the escrow conditions are met, Net
Escrow Interest on the subscriptions held in escrow will be paid to subscribers
earning more than $10.00, although interest credited to each participant in the
Trust's Dividend Reinvestment Plan will be used to purchase additional Common
Shares. The Trust then intends to declare dividends on a quarterly basis during
the balance of the offering period. Thereafter, the Trust will pay such
dividends on a quarterly basis.
If the Minimum Subscription Level is not reached and the other escrow
condition are not satisfied within twelve months of the date of this Prospectus,
(unless such period is extended by the Directors for up to an additional twelve
months) the Trust will terminate this offering. In that event, all monies paid
by subscribers will be returned with any Net Escrow Interest. (See "Plan of
Distribution.")
AFTER OFFERING PERIOD.
After the offering is completed and the Offering Proceeds have been
substantially invested, the Trust will make distributions in amounts determined
by the Directors and in accordance with the Distribution Preferences of the
Preferred and Common Shares, based upon the cash flow from Trust investments in
Home Equity Loans, the Trust's operations and its financial condition. The level
of such distributions may be more or less than the level of such distributions
determined during the offering. The Trust's policy is to make distributions at
least quarterly in amounts aggregating annually at least 95% of its REIT taxable
income (which term does not include capital gains realized by the Trust).
Taxable income remaining after the distribution of the regular quarterly
dividends and any Excess Distribution, will to the extent declared by the Board
of Directors, be distributed annually in a special dividend on or prior to the
date of the first regular quarterly dividend payment date of the following
taxable year. The dividend policy is subject to revision at the discretion of
the Board of Directors. All distributions in excess of those required for the
Trust to maintain REIT status will be made by the Trust at the discretion of the
Board of Directors and will depend on the taxable earnings of the Trust, the
financial condition of the Trust and such other factors as the board of
Directors deems relevant. The Board of Directors has not established a minimum
distribution level. Distributions may be made from (a) surplus, or (b) out of
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year unless the capital represented by the Preferred Shares has
been impaired. (See "Federal Income Tax Considerations.")
Distributions to stockholders will generally be taxable as ordinary
income, although a portion of such distributions may be designated by the Trust
as capital gain or may constitute a tax-free return of capital. The Trust will
annually furnish to each of its stockholders a statement setting forth
distributions paid during the preceding year and their characterization as
ordinary income, capital gains or return of capital. For a discussion of the
federal income tax treatment of distributions by the Trust, see "Federal Income
Tax Considerations."
DIVIDEND REINVESTMENT PLAN - SUMMARY.
The Directors have established a Dividend Reinvestment Plan ("DRP") which
is designed to enable Common Shareholders to have Trust distributions
automatically invested in Common Shares. _______________________ (the "DRP
Administrative Agent") will perform administrative services and
________________________(the "Purchasing Agent") will act as Purchasing Agent,
for participating shareholders.
The Purchasing Agent will receive distributions payable to shareholders
participating in the DRP, and will use those funds, net of brokerage commissions
charged by the Purchasing Agent, to purchase additional Shares for the
participants.
20
<PAGE> 25
During the Initial Public Offering, the shares will be purchased directly from
the Trust at $9.60. No retail sales commission will be paid to the selling
broker/dealer on Shares purchased through the Dividend Reinvestment Plan. After
the Initial Public Offering has ended, and trading on NASDAQ has commenced, the
Shares will be purchased for the DRP only from existing shareholders at market
prices. No Warrants will be issued in connection with Shares purchased under the
DRP. A shareholder may terminate his participation in the DRP at any time by
written notice to the DRP Administrative Agent.
In the opinion of Wilson Ryan & Campilongo, special counsel for the
Trust, the adoption of the DRP and reinvestment of Trust distributions in
additional Common Shares under the DRP will not affect the Trust's qualification
as a REIT under the applicable provisions of the Code, and any distributions to
which a participating shareholder is entitled will be taxable to the
shareholders to the same extent as if he or she had received the distribution.
The Board of Directors intends to monitor all reinvestments under the DRP,
together with all purchases of Common Shares pursuant to the Offering, to ensure
that the Trust complies with applicable concentration tests for shareholdings in
order to meet the REIT qualifications. (See "Federal Income Tax
Considerations").
The foregoing summary is qualified in its entirety by reference to the
DRP. (See "Dividend Reinvestment Plan.") Experience under the DRP may indicate
changes are desirable. Accordingly, the Trust reserves the right to amend any
aspect of the DRP effective with respect to any dividend paid subsequent to a
date thirty days after notice of the change is sent to participants in the DRP.
The Trust also reserves the right to change the Purchasing Agent for any reason
at any time with like notice.
21
<PAGE> 26
- -------------------------------------------------------------------------------
CAPITALIZATION
- -------------------------------------------------------------------------------
The capitalization of the Trust (1) as of April 30, 1996 and (2) as adjusted to
reflect the sale of Common Shares offered hereby (assuming sale of all Common
Shares offered ) is as follows:
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(6)(7)
------ -----------
<S> <C> <C>
SHAREHOLDER'S EQUITY:
Preferred Shares, $.01 par value $ 6,437 $ 6,437
675,000 Preferred Shares authorized; 643,730 Preferred
Shares issued and outstanding actual and as adjusted
Common Shares, $.01 par value $ 0 $ 15,000
2,000,000 Common Shares authorized; no shares issued and
outstanding actual; 1,500,000 Common Shares outstanding as
adjusted
Additional Paid - In Capital $5,996,631 $20,081,631
TOTAL CAPITALIZATION $6,003,068 $20,103,068
</TABLE>
- -----------------------
(6)After deducting estimated underwriting commissions and estimated
offering expenses payable by the Trust.
(7)Does not include 150,000 Common Shares reserved for issuance
pursuant to the Shareholders' Warrants or 150,000 Common Shares reserved for
issuance pursuant to the Managing Dealer's Warrants. Warrants to acquire 150,000
Common Shares at an exercise price of $7.00 per share will be granted to Common
Shareholders on the basis of one Warrant for each ten Common Shares purchased.
Warrants to acquire up to 150,000 Common Shares at an exercise price of $9.00
per share will be granted to Brookstreet or its designees on the basis of one
Warrant for each ten Common Shares sold in this Offering. (See "Plan of
Distribution").
22
<PAGE> 27
- -------------------------------------------------------------------------------
SELECTED FINANCIAL INFORMATION AND COMPARATIVE PER SHARE DATA
- -------------------------------------------------------------------------------
The following tables present selected historical and combined financial
information and comparative per share data for the Trust and the separate
operations of its predecessors. The combined information as of April 30, 1996
gives effect to the combination of CAIT I and CAIT II with the Trust using the
purchase method of accounting. The selected consolidated financial data set
forth below for the Trust and its predecessors for each of the years in the
five-year period ended December 31, 1995 are derived from the financial
statements of the Trust and its predecessors. The selected financial data for
the months ended April 30, 1996 and 1995 and for the years ended December 31,
1991 and 1992 are derived from unaudited financial statements of the Trust and
its predecessors which, in the opinion of management, reflect all adjustments,
consisting only of normal, recurring adjustments, necessary for a fair statement
of the results of the subject periods. The historical financial information is
not necessarily indicative of future operations and should not be so construed.
(See "Index to Financial Statements"). The selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
23
<PAGE> 28
CAIT I
<TABLE>
<CAPTION>
Year Ended December 31 Four Months Ended
-----------------------------------------------------------------------------
(unaudited) (unaudited)
-----------------------------------------------------------------------------
- ------------------------------------------------ April 30, April 30,
HISTORICAL STATEMENT OF OPERATIONS DATA: 1991 1992 1993 1994 1995 1995 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 537 $ 30,626 $100,582 $174,997 $377,363 $111,267 $154,542
- --------------------------------------------------------------------------------------------------------------------------------
Net income -- 26,593 83,722 147,056 318,397 85,822 127,070
- --------------------------------------------------------------------------------------------------------------------------------
Net income allocated to Class A Shares -- (8) 82,885 145,585 315,213 84,964 125,799
- --------------------------------------------------------------------------------------------------------------------------------
Net income per weighted average Class A Share(9) -- (1) 0.934 0.823 0.964 0.260 0.365
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average Class A Shares (1) (1) 88,748 176,902 327,152 327,199 344,435
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
At December 31 Four Months at
-------------------------------------------------------------------------------
(unaudited) (unaudited)
-------------------------------------------------------------------------------
- --------------------------------------------- April 30,
HISTORICAL BALANCE SHEET DATA: 1991 1992 1993 1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage notes receivable -- $ 524,000 $ 620,500 $1,889,485 $2,952,715 $2,663,072
- -------------------------------------------------------------------------------------------------------------------------------
Total assets 294,290 696,794 1,071,505 3,147,661 3,326,489 3,406,432
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,641 16,710 29,269 55,741 53,659 173,848
- -------------------------------------------------------------------------------------------------------------------------------
Shareholders' capital 283,649 680,084 1,042,236 3,091,920 3,272,830 3,232,584
- -------------------------------------------------------------------------------------------------------------------------------
Book value per outstanding Class A Share (1) (1) 9.51 9.50 9.50 9.40
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(8) Computed using net income allocated to Class A Shares divided by
weighted average Class A Shares.
(9) There are no Class A Shares issued for the predecessor to CAIT I for
these year.
24
<PAGE> 29
CAIT II
<TABLE>
<CAPTION>
Year Ended December 31 Four Months Ended
----------------------------------------------------------
(unaudited)
----------------------------------------------------------
April 30, April 30,
HISTORICAL STATEMENT OF OPERATIONS DATA: 1994 1995 1995 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ -- $112,000 $ 10,355 $119,167
- -------------------------------------------------------------------------------------------------------------------
Net income -- 96,017 7,939 99,573
- -------------------------------------------------------------------------------------------------------------------
Net income allocated to Class A Shares -- 95,057 7,860 98,577
- -------------------------------------------------------------------------------------------------------------------
Net income per weighted average Class A Share(10) -- 0.861 0.394 0.333
- -------------------------------------------------------------------------------------------------------------------
Weighted average Class A Shares -- 110,454 19,949 296,066
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
At December 31 At April 30,
--------------------------------------------------------------
(unaudited)
------------
HISTORICAL BALANCE SHEET DATA: 1994 1995 1996
- -------------------------------------------------------------------------------- ------------
<S> <C> <C> <C>
Mortgage notes receivable $ -- $1,849,355 $2,094,823
- -------------------------------------------------------------------------------- ------------
Total assets 1,000 2,927,563 2,860,819
- -------------------------------------------------------------------------------- ------------
Total liabilities -- 110,363 89,468
- -------------------------------------------------------------------------------- ------------
Shareholders' capital 1,000 2,817,200 2,771,351
- -------------------------------------------------------------------------------- ------------
Book value per outstanding Class A Share -- 9.47 9.46
- -------------------------------------------------------------------------------- ------------
</TABLE>
- --------
(10) Computed using net income allocated to Class A Shares divided by
weighted average Class A Shares.
25
<PAGE> 30
THE TRUST
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
CAIT I & CAIT II Combined
Four Months Ended
April 30, 1996
HISTORICAL STATEMENT OF OPERATIONS DATA: (unaudited)
- -------------------------------------------------------------------------------------
<S> <C>
Revenue $ 273,709
- -------------------------------------------------------------------------------------
Net income 226,643
- -------------------------------------------------------------------------------------
Net income allocated to Class A Shares 224,376
- -------------------------------------------------------------------------------------
Net income per weighted average Class A Share(11) 0.350
- -------------------------------------------------------------------------------------
Weighted average Class A Shares 640,501
- -------------------------------------------------------------------------------------
Pro-forma net income per Preferred Share 0.350
- -------------------------------------------------------------------------------------
Pro-forma weighted average Preferred Shares(12) 646,971
- -------------------------------------------------------------------------------------
<CAPTION>
Pro-Forma
CAIT I & CAIT II Combined Combined
At April 30, 1996 At April 30, 1996
HISTORICAL BALANCE SHEET DATA: (unaudited) (13)
- --------------------------------------------------------------------------------------------------------------
Mortgage notes receivable $4,757,895 $4,757,895
- --------------------------------------------------------------------------------------------------------------
Total assets 6,267,251 6,269,617
- --------------------------------------------------------------------------------------------------------------
Total liabilities 263,316 266,549
- --------------------------------------------------------------------------------------------------------------
Shareholders' capital 6,003,935 6,003,068
- --------------------------------------------------------------------------------------------------------------
Book value per outstanding Class A Share 9.43 --
- --------------------------------------------------------------------------------------------------------------
Pro-forma outstanding Preferred Shares(14) -- 643,730
- --------------------------------------------------------------------------------------------------------------
Pro-forma book value per outstanding Preferred Share -- 9.33
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(11) Computed using net income allocated to Class A Shares divided by
weighted average Class A Shares.
(12) Weighted average of Preferred Shares outstanding as if the
Consolidation of CAIT I and CAIT II with the Trust had occurred at the
beginning of the period. There are no shares of Common Stock issued or
outstanding.
(13) The Trust commenced operations on May 1, 1996. Assets reflect
organization costs of consolidation.
(14) Number of Preferred Shares issued in the Consolidation of CAIT I and
CAIT II with the Trust in exchange for Class A and Class B Shares of
CAIT I and CAIT II.
26
<PAGE> 31
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The financial statements of the predecessors, Capital Alliance Income
Trust I ("CAIT I") and Capital Alliance Income Trust II ("CAIT II") included
elsewhere herein were prepared based upon the historical operations of each
entity. Also included elsewhere herein are the pro-forma results of operations
assuming both entities were combined for all periods presented.
GENERAL
Predecessors; The Combination Capital Alliance Income Trust, a Real
Estate Investment Trust (the "Trust") resulted from the consolidation of CAIT I
and CAIT II (the "Combination") on April 30, 1996. The Trust exchanged shares of
preferred stock for all of the outstanding whole shares of CAIT I and CAIT II at
April 30, 1996. Holders of the fractional shares of CAIT I and CAIT II received
cash in lieu of fractional shares of preferred stock of the Trust. Thereafter,
all assets and liabilities of CAIT I and CAIT II were transferred to the Trust.
CAIT I and CAIT II were both privately-held mortgage investment trusts which
invested primarily in loans secured by deeds of trust on residential property.
The Trust was incorporated in Delaware on December 12, 1995. CAIT I resulted
from the reorganization of Capital Alliance Managed Income Fund, L.P., a
California limited partnership ("CAMIF") on March 9, 1993. CAMIF was formed July
11, 1991 and was also in the business of investing in home equity loans. CAIT II
was formed October 18, 1994 and began its first year of operations in 1995. CAIT
I and CAIT II were formed and managed by Capital Alliance Advisors, Inc.
("CAAI") which will also manage the Trust and originate, service and sell the
Trust's mortgage loans.
Recent Trends of Predecessors CAIT I's mortgage loan acquisitions in
the four-month period ended 1996 declined to $341,500 from $867,255 in the same
period of the previous year, primarily due to a decrease in cash available for
investments in mortgage loans. In 1995 mortgage loan acquisitions decreased to
$1,510,656 from $1,569,985 in 1994.
CAIT II's mortgage loan acquisitions in the four-month period ended
1996 increased to $680,556 from $417,000 in the same period of the previous
year, due to an increase in cash available for investments in mortgage loans
from the offering of CAIT II's Class A shares. In 1995, CAIT II's first year of
operations, mortgage loan acquisitions were $2,229,355.
CAIT I and CAIT II each invested in non-conforming mortgage loans on
one-to-four unit residential properties because management believed that there
is a large demand for non-conforming mortgage loans on these kinds of properties
which produce higher yields without comparably higher credit risks when compared
with conforming mortgage loans. Management invests in B/C (or less) credit rated
home equity loans secured by deeds of trust. In general, B and C credit rated
home equity loans are made to borrowers with lower credit ratings than borrowers
of higher credit quality, such as A credit rated home equity loans. Home equity
loans rated B/C (or less) tend to have higher rates of loss and delinquency, but
a higher rate of interest than borrowers of higher credit quality.
Management believes there is increased demand for high-yielding
non-conforming mortgage loans caused by a demand by investors for higher yields
due to low interest rates over the past few years and increased securitization
of high-yielding non-conforming mortgage loans by the investment banking
industry.
Loan Origination and Loan Servicing Mortgage loan origination consists
of obtaining and reviewing documentation concerning the credit rating and net
worth of borrowers, inspecting and appraising properties that are proposed as
the subject of a home equity loan, processing such information and underwriting
and funding the mortgage loan. Mortgage loan servicing consists of collecting
payments from borrowers, accounting for interest payments, holding escrow funds
until fulfillment of mortgage loan requirements, contacting delinquent
borrowers, foreclosing in the event of unremedied defaults and performing other
administrative duties. Mortgage loan origination and loan servicing were
provided to CAIT I and CAIT II by CAAI.
Commitments and Contingencies As of April 30, 1996, CAIT I and CAIT II
held a few mortgage loans that had matured and were delinquent. In assessing the
collectibility of these delinquent mortgage loans, management estimates a net
gain will be realized upon sale of the properties securing these loans if it is
necessary to foreclose the mortgage loans due
27
<PAGE> 32
to CAIT I or CAIT II. Management's estimate is based on an anticipated sales
price of the 1995 appraised value of the property discounted at 15% less the sum
of pre-existing liens, costs of sale, the face amount of the mortgage loan and
accrued interest receivable.
RESULTS OF OPERATIONS; CAPITAL ALLIANCE INCOME TRUST I
The following discussion relates to CAIT I's mortgage investment
operations. The historical information presented herein is not necessarily
indicative of future operations.
Four Months Ended April 30, 1996 Compared to Four Months Ended April
30, 1995 Revenues for the four months ended April 30, 1996 increased to $154,542
as compared to $111,267 for the same period of the previous year. Such revenues
are composed of interest income earned on the mortgage notes receivable
outstanding.
Expenses for the four months ended April 30, 1996 increased to $27,472
as compared to $25,445 for the same period of the previous year due to an
increase in general administration expenses and a $14,000 interest bad debt
reserve for the four months ended April 30, 1996 as compared to a $8,000
interest bad debt reserve for the same period of the previous year.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues for the year ended December 31, 1995 increased to $377,363 as compared
to $174,997 for 1994. The increase was due to interest collected on the higher
average outstanding balance of mortgage notes receivable as compared to the
average outstanding balance of mortgage notes receivable for the same period in
the previous year.
Expenses for the year ended December 31, 1995 increased to $58,966 as
compared to $27,941 for 1994. The increase in expenses was the result of
increased loan servicing fees resulting from the increase in CAIT I's net asset
value ("Net Asset Value"). CAIT I paid loan servicing fees equal to 1% annually
of its Net Asset Value for loan servicing and administration of CAIT I's loan
portfolio. Management defined Net Asset Value as the aggregate book value of
CAIT I's trust deed loans plus other CAIT I assets less all liabilities and bad
debt reserves of CAIT I. In addition, total expenses for 1995 include a $12,000
interest bad debt reserve as compared to no allowance for bad debt for the same
period of the previous year.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenues for the year ended December 31, 1994 increased to $174,997 as compared
to $100,582 for 1993. The increase was due to interest collected on the higher
average outstanding balance of mortgage notes receivable as compared to the
average outstanding balance of mortgage notes receivable for the same period in
the previous year and due to a $17,990 gain on the sale of foreclosed
properties.
Expenses for the year ended December 31, 1994 increased to $27,941 as
compared to $16,860 for 1993. The increase in expenses was primarily due to an
increase in loan servicing fees resulting from the increase in CAIT I's Net
Asset Value.
RESULTS OF OPERATIONS; CAPITAL ALLIANCE INCOME TRUST II
The following discussion relates to CAIT II's mortgage investment
operations. The historical information presented herein is not necessarily
indicative of future operations.
Four Months Ended April 30, 1996 Compared to Four Months Ended April
30, 1995 Revenues for the four months ended April 30, 1996 increased to $119,167
as compared to $10,355 for the same period of the previous year. Such revenues
are composed of interest income earned on the mortgage notes receivable
outstanding. Interest income increased primarily as a result of CAIT II's higher
average outstanding loan balance for the four months ended April 30, 1996 as
compared to its average outstanding loan balance for the same period of the
previous year. Such increase was due to the fact that 1995 was the first year of
operations of CAIT II which did not have available cash to fund investments in
mortgage loans until the later part of 1995 when it received capital
contributions from investors and used these proceeds to fund investments in
mortgage loans.
28
<PAGE> 33
Expenses for the four months ended April 30, 1996 increased to $19,594
as compared to $2,416 for the same period of the previous year. The increase in
expenses was the result of increased loan servicing fees resulting from the
increase in CAIT II's net asset value ("Net Asset Value"). CAIT II paid loan
servicing fees equal to 1% annually of its Net Asset Value for loan servicing
and administration of CAIT II's loan portfolio. Management defined Net Asset
Value as the aggregate book value of CAIT II's trust deed loans plus other CAIT
II assets less all liabilities and bad debt reserves of CAIT II. As mentioned
above, CAIT II began its first year of operations in 1995 and its Net Asset
Value did not significantly increase until the later part of 1995 when CAIT II
received capital contributions from investors and used these proceeds to fund
investments in mortgage loans. In addition, total expenses for the four months
ended April 30, 1996 include a $6,000 interest bad debt reserve as compared to
no allowance for bad debt for the same period of the previous year.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
For the year ended December 31, 1995 revenues were $112,000 and expenses were
$15,983. CAIT II began its first year of operations in 1995.
INFLATION
The financial statements of CAIT I and CAIT II, prepared in accordance
with generally accepted accounting principles, report each entity's financial
position and operating results in terms of historical dollars and does not
consider the impact of inflation. Inflation affects each entity's operations
primarily through its effect on interest rates, since interest rates normally
increase during periods of high inflation and decrease during periods of low
inflation. When interest rates increase, the demand for mortgage loans and a
borrower's ability to qualify for mortgage financing may be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity of CAIT I and CAIT II will be based upon the need to fund
investments in mortgage loans. In previous years, each entity's mortgage
investment operations were funded by capital contributions. The issuance of
common stock in this Offering will help to fund future investments in mortgage
loans by the Trust's Mortgage Investment Business.
Capital Alliance Income Trust I Net cash provided by operating
activities during the four months ended April 30, 1996 and 1995 was $141,181 and
$49,495, respectively, and during the years ended December 31, 1995, 1994 and
1993 was $294,281, $147,793 and $91,508, respectively. Net cash for all periods
was positively affected by improved market conditions in the mortgage banking
industry.
Net cash provided by (used in) investing activities for the four months
ended April 30, 1996 and 1995 was $289,643 and $(764,727), respectively, and
during the years ended December 31, 1995, 1994 and 1993 was $(1,163,230),
$(1,268,985) and $(96,500), respectively. During these periods except for the
four-month period ended April 30, 1996, fundings of mortgage note receivables
exceeded the repayment rate for such receivables primarily due to higher
mortgage loan acquisition volumes. For the four months ended April 30, 1996, net
cash was negatively affected by a higher repayment rate on mortgage notes
receivable than mortgage notes receivable funded.
Net cash provided by (used in) financing activities during the four
months ended April 30, 1996 and 1995 was $(104,816) and $(70,747), respectively,
and during the years ended December 31, 1995, 1994 and 1993 was $(199,987),
$1,902,628 and $278,430, respectively. For the four months ended April 30, 1996
and 1995 and the year ended December 31, 1995, net cash was negatively affected
by dividends paid to shareholders, organizational and offering costs, and a
redemption of Class A shares exceeding capital contributions received. For the
years ended December 31, 1994 and 1993, capital contributions exceeded
organizational and offering costs and dividends paid to shareholders, having a
positive effect on net cash.
Capital Alliance Income Trust II Net cash provided by operating
activities during the four months ended April 30, 1996 and 1995 was $69,164 and
$5,378, respectively, and during the year ended December 31, 1995 was $109,132.
Net cash for all periods was positively affected by improved market conditions
in the mortgage banking industry.
Net cash used in investing activities for the four months ended April
30, 1996 and 1995 was $245,468 and $417,000, respectively, and during the year
ended December 31, 1995 was $1,949,355. During these periods, net cash was
negatively affected by a higher repayment rate on mortgage notes receivable than
mortgage notes receivable funded.
29
<PAGE> 34
Net cash provided by financing activities during the four months ended
April 30, 1996 and 1995 was $57,589 and $535,466, respectively, and during the
years ended December 31, 1995, and 1994, was $2,517,172, and $1,000,
respectively. During these periods, capital contributions exceeded
organizational and offering costs and dividends paid to shareholders, having a
positive effect on net cash.
The Trust will use the net proceeds of this Offering to provide funding
for the Trust's Mortgage Investment Business and, to a more limited extent, its
planned Mortgage Conduit Business. Management believes that cash flow from
operations and the net proceeds of this Offering plus the establishment of a
warehouse line of credit for the Mortgage Conduit Business will be sufficient to
meet the current liquidity needs of the Trust's businesses.
30
<PAGE> 35
- --------------------------------------------------------------------------------
BUSINESS
- --------------------------------------------------------------------------------
GENERAL
The Trust is a Delaware corporation which will elect to be taxed as a
REIT. As a result of this election, the Trust will not, with limited exceptions,
be taxed at the corporate level on the net income distributed to the Trust's
shareholders. The Trust will operate two businesses, one of which will include
the existing and ongoing Mortgage Investment Business of the Trust which is a
portfolio lender for high-yielding non-conforming B/C-credit residential
mortgage loans. The second business which has not been commenced to date, but
which the Trust plans to establish with a portion of the proceeds of this
Offering, will be a wholesale mortgage banking business which will originate and
purchase high-yielding non-conforming residential mortgage loans and
subsequently will make whole loan sales of such loans to permanent investors
("Mortgage Conduit Business").
Mortgage Investment Business. The first business will be the Mortgage
Investment Business, a business that invests primarily in Home Equity Loans and
other non-conforming residential mortgage loans which will be secured by both
first and second mortgage loans with a total or combined loan-to-value ratio
(including both the mortgage loan and any senior liens encumbering the property)
("Combined Loan-to-Value Ratio") which will not exceed 75%. Such loans will
generally be comprised of "B" and "C" grade residential mortgage loans and have
maturities ranging from one to fifteen years although some initial loans are
expected to have maturities of one to five years. The Trust's Mortgage
Investment Business will not invest in loans on commercial, or agricultural
properties or on undeveloped land, although such properties may be taken as
additional collateral for Home Equity Loans and considered in the Loan-to-Value
computations at up to 25% of their appraised value.
Non-conforming B/C (or less) credit-rated residential mortgage loans
are loans that do not qualify for purchase by government-sponsored agencies such
as FNMA and FHLMC. Such loans provide higher yields than conforming loans. B/C
residential mortgage loans are made to borrowers with lower credit ratings than
borrowers of higher quality or so-called "A" grade mortgage loans, and are
normally considered to be subject to concomitantly higher rates of loss and
delinquency. As a result, B/C mortgage loans normally bear a higher rate of
Interest and are subject to higher fees than loans of "A" quality. The principal
differences between conforming loans and Home Equity Loans and other
non-conforming residential loans include the applicable loan-to-value ratios,
the credit and income histories of the mortgagors, the documentation required
for approval of the mortgagors, the type of properties securing the mortgage
loans, the loan sizes, and the mortgagor's occupancy status with respect to the
mortgaged properties. Home Equity Loans are higher-yielding collateral-based
mortgage loans made to borrowers owning single-family homes or two-to-four unit
residential properties, for the purpose of debt consolidation, home
improvements, business, education and a variety of other purposes. Management of
the Trust has experience in managing mortgage loan investment portfolios of the
type in which the Trust invests.
Mortgage Conduit Business. The Mortgage Conduit business which the
Trust plans to establish with a portion of the proceeds of the Offering will
constitute the Trust's second business and will originate and purchase B/C
credit-rated non-conforming residential mortgage loans from third party mortgage
brokers and mortgage loan correspondents and will subsequently sell such loans
to permanent investors. On formation of the Mortgage Conduit Subsidiary, CAAI
will own all of the voting common stock and a 1% economic interest in the
Mortgage Conduit Subsidiary. The Trust will own all of the non-voting preferred
stock representing 99% of the economic interest in the Mortgage Conduit
Subsidiary. CAAI will have the power to elect all of the directors of the
Mortgage Conduit Subsidiary and the ability to control the outcome of all
matters for which the consent of the holders of the common stock of such
subsidiary is required. The Trust plans to establish the Mortgage Conduit
Business either directly through a non-qualified REIT subsidiary, or indirectly,
through a joint venture which may be with an affiliated company in which the
Trust holds a strategic investment, or with an as yet unidentified unaffiliated
third party. The Trust believes that the Mortgage Conduit Business' ability to
present non-conforming mortgage loan programs, which suit the mortgage brokerage
network and the needs of correspondent loan originators and their borrowers,
while providing sufficient credit quality to investors, as well as an efficient
loan origination and purchasing process, and competitive pricing, will enable it
to compete effectively with other non-conforming mortgage loan conduits and
lenders. It is expected that the Mortgage Conduit Business, in addition to
ongoing sales to third party investors, will support the Mortgage Investment
Business of the Trust by supplying the Trust's Mortgage Investment Business with
non-conforming mortgage loans at costs which are competitive with third parties.
31
<PAGE> 36
MORTGAGE INVESTMENT BUSINESS
General. The Trust will originate or acquire Home Equity Loans and
other high-yielding non-conforming residential mortgage loans, including, second
mortgage loans for longer-term investment. Such loans pursuant to the Trust's
current loan policies, will have Combined Loan-to-Value Ratios of not more than
75%, and maturities of not more than 15 years. In addition to the Trust's policy
of a 75% maximum Combined Loan-to-Value Ration, the Trust's Mortgage Investment
Business will calculate the cost of carrying each Home Equity Loan or other
mortgage loan for 12 months, assuming that there has been a foreclosure on the
property. This calculation assumes that, once a delinquency occurs, the Trust
will foreclose on the property within the first six months and sell the property
within the next six months. If the estimate of total cost to carry the property
for 12 months (including keeping any prior mortgage current and foreclosure,
selling and repair costs) exceed 90% of the property's appraised value at the
time of projected funding, the Trust will not make the loan ("90% Test"). In
addition, the Trust will maintain reasonable reserves to be utilized to cover
the costs of any foreclosure and to protect the Trust's home Equity Loans
against the foreclosure of any prior liens. The Trust's Mortgage Investment
Business will not invest in loans on commercial, or agricultural properties or
on undeveloped land, although such properties may be taken as additional
collateral for Home Equity Loans and considered in the Loan-to-Value
computations at up to 25% of their appraised value. Income is earned principally
from the net interest income received by the Trust on the Home Equity Loans and
other non-conforming residential mortgage loans acquired and held in its
portfolio and from fees received in connection with their origination. Such
loans will be acquired with the major portion of the Trust's capital, as well as
borrowings (which are limited by the Trust's By-laws to 20% of the Trust's Net
Capital Contributions) provided through reverse repurchase agreements or lines
of credit. The Trust's Mortgage Investment Business currently originates loans
primarily through two branch offices in San Diego and Danville, California which
have established relationships with independent mortgage loan brokers through
which the Trust originates loans. It is expected that the Mortgage Conduit
Business will support the investment objectives of the Trust's Mortgage
Investment Business by supplying non-conforming residential mortgage loans to
the Trust at competitive costs. All loans by the Mortgage Investment Business
must be approved by the Manager's Investment Committee (currently comprised of
Messrs. Swartz, Konczal and Thompson). The Mortgage Investment Business intends
to expand its loan origination volume through the addition of account executives
to establish relationships with additional independent mortgage loan brokers and
financial institutions such as small commercial banks, savings banks and thrift
institutions. It also intends to expand its geographic areas of lending
throughout the Western United States as its capital base and its underwriting
capability increases.
Management believes that there is a large demand for non-conforming B/C
credit-rated mortgage loans (including Home Equity Loans) and that such
non-conforming mortgage loans, given the maximum 75% Combined Loan-to-Value
policy established by the Trust, produce higher yields without commensurately
higher credit risks when compared with conforming mortgage loans. The Trust
expects that a substantial portion of all the loans purchased or originated for
the Trust's Mortgage Investment Business will be Home Equity Loans and "B" and
"C" grade non-conforming mortgage loans. The Trust believes that a structural
change in the mortgage banking industry has occurred which has increased demand
for higher yielding non-conforming mortgage loans. This change has been caused
by a number of factors, including: (1) a demand for higher yields on the part of
investors, due to historically low interest rates over the past few years; (2)
increased securitization of high-yielding non-conforming mortgage loans by the
investment banking industry; (3) increased competition in the securitization
industry and (4) the increased number of home owners and purchasers with
impaired credit as a result of the down-sizing in U.S. industry and other
economic misfortunes. The Trust believes that its competitive strengths in its
Mortgage Investment Business are its responsive and prompt service, and its
flexible underwriting to independent mortgage brokers who offer loans to
borrowers with impaired credit whose needs are not met by traditional financial
institutions.
As of May 1, 1996, the Trust's Mortgage Investment Business had a
combined loan portfolio of 59 Home Equity Loans, aggregating $4,757,895 in
principal amount with a Combined-Loan-to-Value Ratio of 64.27%, an average loan
size of $82,032, an average weighted yield of $13.43% and an average maturity of
13.43 months. 51.92% of the portfolio were first deeds of trust and 48.08% were
second deeds of trust. All of the Mortgage Investment Business' portfolio loans
are secured by California properties and are serviced by the Manager. (See
"Management - The Manager, Home Equity Loan Origination and Loan Servicing
Agreement").
Financing. Mortgage loans for the Trust's Mortgage Investment Business
will be financed primarily by the Trust's capital (See "Estimated Use of
Proceeds" and "Additional Sources of Funds"). Such loans may also be financed at
short-term borrowing rates through reverse repurchase agreements, borrowings
under lines of credit and other financings which the
32
<PAGE> 37
Company may establish, but such financing may not exceed 20% of the Trust's Net
Capital Contributions. It is expected that reverse repurchase agreements or a
secured line of credit will be the principal financing devices utilized by the
Trust to leverage its mortgage loan portfolio. A reverse repurchase agreement,
although structured as a sale and repurchase obligation, acts as a financing
under which the Trust effectively pledges its mortgage loans as collateral to
secure a short-term loan. Generally, the other party to the agreement will make
the loan in an amount equal to a percentage of the market value of the pledged
collateral.
The Trust does not currently plan to issue Mortgage-Backed Securities
such as Collateralized Mortgage Obligations ("CMOs") or mortgage pass-through
certificates representing an undivided interest in pools of mortgage loans
formed by the Trust. There is no assurance that the Trust will not adopt
financing strategies in the future which will include the issuance of
mortgage-backed securities as an alternative for the financing of its Mortgage
Investment Business. Similarly, the investment policies of the Trust for its
Mortgage Investment Business and its by-laws may be modified by the Trust's
Board of Directors.
The Mortgage Investment Business will bear the potential risk of
increased delinquency rates and/or credit losses as well as interest rate risk
with respect to the loans held in its portfolio. However, Management believes
that such risks are substantially mitigated by the Combined Loan-to-Value ratios
maintained by the Trust's Mortgage Investment Business and by the higher yield
of its portfolio.
MORTGAGE CONDUIT BUSINESS.
General. The Trust plans to commence its Mortgage Conduit Business
either through a subsidiary of the Trust or through a joint venture of such
subsidiary and a third party mortgage banking firm. The REIT Provisions of the
Code limit the amount of capital which the Trust may invest in its planned
Mortgage Conduit Business to 5% of the value of the Trust's total assets. One
advantage of the Trust's planned Mortgage Conduit Business is that it allows the
Trust, through its subsidiary, the flexibility to originate or buy and then sell
loans to permanent investors in volume. By focusing on non-conforming mortgage
products with positive spreads, the velocity of the sale of loans by the
Mortgage Conduit Business should enhance its profitability and the level of its
dividend payments to the Trust. The Trust currently has a strategic investment
of $200,000 in Preferred Shares of Sierra Capital Acceptance ("SCA"), a
wholesale mortgage banking firm in Irvine, California, which is an affiliate of
the principals of the Trust's Manager. No decision has been made to date as to
whether the Trust's Mortgage Conduit Business will be established directly, or
indirectly through such a joint venture with SCA, or another wholesale
unaffiliated mortgage firm. SCA is currently originating through mortgage
correspondents and brokers "A-", "B" and "C" credit-rated non-conforming
residential mortgage loans at the rate of $4 million to $5 million per month for
sale to permanent investors, including The Money Store, Ford Consumer Finance
Company, GMAC's Residential Finance Corporation, Access Financial (Cargill
Corporation), and others. The Trust's Mortgage Conduit Business will commence
upon the earlier of completion of this offering, or when the required state
licensing as a Consumer Finance Lender in California is completed and required
warehouse lending facilities are arranged, . The Mortgage Conduit Business will
originate mortgage loans both through a network of mortgage loan brokers and
through mortgage loan correspondents which will be developed directly through
CAAI or which will be provided by a joint venture partner if such a joint
venture is established.
The Mortgage Conduit Business will consist primarily of the origination
and the purchase and sale of B/C credit rated mortgage loans secured by first
liens and, to a lesser extent, second liens on single (one-to-four) family
residential properties that are originated in accordance with its underwriting
guidelines. As a non-conforming mortgage loan conduit, the Trust's Mortgage
Conduit Business will act as a conduit between the originators of such mortgage
loans and permanent investors in such loans. The Management believes that
non-conforming B/C credit rated mortgage loans, when properly underwritten,
provide an attractive net earnings profile, producing higher yields without
disproportionately higher credit risks when compared to mortgage loans that
qualify for purchase by FNMA or FHLMC. The Trust's policy for its Mortgage
Investment Business which limits the financing or leveraging of its mortgage
loan portfolio will not apply to its Mortgage Conduit Business since such
mortgage loans are generally held for less than sixty days prior to their sale
to permanent investors who securitize such loans in the secondary market and
their acquisition or funding will generally be facilitated through a warehouse
line of credit. Such warehouse lending facility typically involves short term
lines of credit which are used to finance the hypothecation of mortgage loans
from the time of acquisition of the loan to the time of its sale or other
settlement with a pre-approved investor or purchaser.
33
<PAGE> 38
All loans originated or purchased by the Mortgage Conduit Business and
meeting the Trust's investment criteria and policies will be made available for
sale to the Trust first on terms no less favorable to the Trust than is
generally available from other institutional investors in similar mortgage
loans. Loans not purchased by the Trust's Mortgage Investment Business will be
sold in the secondary market through whole loan sales.
The Mortgage Conduit Business intends to acquire all of the servicing
rights on loans it originates or purchases and such servicing rights will
normally be relinquished when loans are sold into the secondary market. The
Mortgage Conduit Business will generally have no on-going risk of loss after a
whole loan sale other than liability with respect to normal warranties and
representations given in such sales and for fraud in the origination process.
The Trust's Mortgage Conduit business does not currently plan to
directly securitize the loans originated and purchased by it. There is no
assurance that the Mortgage Conduit Business will not securitize such loans,
either directly or indirectly, in the future.
Marketing Strategy. The Trust's competitive strategy in its Mortgage
Conduit Business, is to be a substantial originator, through a mortgage loan
broker and correspondent network, of B/C residential mortgage loans to be sold
in the secondary market network. This will enable the Trust to shift the high
fixed costs of interfacing with the homeowner to the correspondents and brokers.
The marketing strategy for the Mortgage Conduit Business is designed to
accomplish three objectives: (1) attract a diverse group of loan originators and
loan correspondents throughout California and the western United States, (2)
establish relationships with such brokers and correspondents and, (3) originate
and/or purchase the loans on both an individual and bulk basis and sell them
into the secondary market or to the Trust's Mortgage Investment Business. In
order to accomplish these objectives, the Trust will offer loan products that
are attractive to potential non-conforming borrowers as well as to end-investors
in non-conforming mortgage loans . To accomplish these objectives, the Mortgage
Conduit Business intends to establish a Wholesale Division and a Correspondent
Division, to expand the reach, geographically, of each of such divisions, and to
develop and provide responsive and consistent underwriting and funding services
to the mortgage broker and correspondent networks which it plans to develop.
Mortgage Loans to be Originated and Acquired. A substantial portion of
the mortgage loans to be originated or purchased through the Mortgage Conduit
Business are expected to be "A-", "B" and "C" grade non-conforming mortgage
loans. Such non-conforming loans may involve some greater risk as a result of
underwriting and product guidelines which will differ from those applied by FNMA
and FHLMC primarily with respect to loan-to-value ratios, borrower income or
credit history, required documentation, interest rates, and borrower occupancy
of the mortgaged property. The Mortgage Conduit Business generally will not
originate or acquire mortgage loans with principal balances above $300,000. Such
loans may also entail greater credit risks than other non-conforming loans.
It is anticipated that mortgage loans originated or acquired by the
Mortgage Conduit Business will generally be "B" and "C" grade mortgage loans
secured by first liens and, to a lesser extent, second liens on single
(one-to-four) family residential properties with either fixed or adjustable
interest rates. Fixed-rate mortgage loans have a constant interest rate over the
life of the loan, which is generally 15, 20 or 30 years. The interest rate on an
adjustable rate mortgage ("ARM") is typically tied to an index (such as LIBOR)
and is adjustable periodically at various intervals. Such mortgage loans are
typically subject to lifetime interest rate caps and periodic interest rate
and/or payment caps. The interest rates on ARMs are typically lower than the
average comparable fixed rate loan initially, but may be higher than average
comparable fixed rate loans over the life of the loan. Management anticipates
that substantially all mortgage loans purchased by the Mortgage Conduit Business
will fully amortize over their remaining terms. In general, "B" and "C" grade
loans are non-conforming residential mortgage loans made to borrowers with lower
credit ratings than borrowers of higher quality, or so called "A" grade mortgage
loans, and are normally subject to higher rates of loss and delinquency than the
other non-conforming loans to be purchased by the Mortgage Conduit Business. As
a result, "B" and "C" grade loans normally bear a higher rate of interest, and
may be subject to higher fees (including greater prepayment fees and late
payment penalties), than non-conforming loans of "A" quality. In general,
greater emphasis is placed upon the credit history of the borrower in
underwriting "B" and "C" grade mortgage loans than in underwriting "A" grade
loans. In addition, "B" and "C" grade loans are generally subject to lower
loan-to-value ratios than "A" grade loans.
The Mortgage Conduit Business' planned focus on the origination and
acquisition of non-conforming B/C credit mortgage loans may affect the Trust's
financial performance. For example, the origination and purchase market for
non-
34
<PAGE> 39
conforming loans has typically provided for higher interest rates, thereby
potentially enhancing the interest income earned by the Mortgage Conduit
Business during the accumulation phase for loans held for sale. However, the
Mortgage Conduit Business will assume the potential risk of any increased
delinquency rates and/or credit losses as well as interest rate risk in the
event there is a delay in the sale of such loans to permanent investors.
Normally, such on-going risks, upon the sale of a loan will pass to the
purchaser without recourse to the Trust and are reduced by the relatively short
period that such loans are held and accumulated prior to sale to permanent
investors. (See "Risk Factors -Lending Risks and Related Considerations").
The Mortgage Conduit Business' loan purchase activities are expected in
the future to focus on those Western states of the United States where higher
volumes of non-conforming mortgage loans are originated, including California,
Nevada, Utah, Colorado, Oregon and Washington.
Pricing. The Mortgage Conduit Business will set purchase prices for
mortgage loans it originates or acquires based on prevailing market conditions.
Different prices will be established for the various types of loans based on the
anticipated price it will receive upon sale of the loans, the anticipated
interest spread realized during the accumulation period, and the targeted profit
margin.
Underwriting. The Mortgage Conduit Business will develop underwriting
guidelines which will be provided to its account executives and to all mortgage
loan brokers and mortgage bankers prior to accepting any loan application or any
single or bulk purchase package. Upon receipt of a loan application from a
mortgage loan broker, the underwriting staff (or a contract underwriter) will
determine if the loan meets the underwriting guidelines. To assess the quality
of the loan, the underwriter will consider various factors, including the
appraised value of the collateral property, the applicant's debt payment
history, credit profile and employment status, and the combined debt ratio and
Loan-to-Value Ratio upon completion of the loan.
Prior to funding a loan, the underwriting staff will determine the
applicant's creditworthiness and ability to service the loan. In addition, the
underwriting staff will review the value of the underlying collateral based on a
full appraisal completed by a pre-approved licensed independent appraiser or, if
the appraiser has not been approved, a new or a review appraisal may be
required. The Mortgage Investment Business and the Mortgage Conduit Business
will select appraisers based on professional experience, education, membership
in related professional organizations and by reviewing the appraiser's
experience with the type of property being used as collateral. For loans
purchased, the Mortgage Conduit Business will typically request a second
appraisal if the original appraisal was completed by an appraiser not approved
by the Mortgage Conduit Business.
Verification of personal financial information and credit history will
also be required prior to the closing of a loan. Generally, applicant will be
required to have two years of employment with their current employer or two
years of similar business experience. Applicants who are salaried must provide
current employment information as well as recent employment history. The
underwriting staff will verify this information for salaried borrowers based on
written confirmation from employers, or a combination of a telephone
confirmation from the employer and the most recent pay stub or W-2 tax form.
Self-employed applicants will generally be required to provide copies of
complete federal income tax returns filed for the most recent two years. A
credit report of from an independent, nationally recognized credit reporting
agency reflecting the applicant's credit history will be used. Verification of
information regarding the first mortgage, if any, is also required, including
balance, status and whether local taxes, interest, insurance and assessment are
included in the applicant's monthly payment or paid.
Upon completion of the underwriting process, the closing of the loan
will be completed in accordance with established closing procedures.
Whole Loan Sales. It is anticipated that the Mortgage Conduit Business
will sell its entire interest in its loans through whole loan sales. It does not
currently plan to sell senior interest in its loans in the secondary market
through a securitization program under which it could retain a residual interest
in each loan securitization. The Mortgage Investment Business, in order to
qualify as a REIT, may not regularly sell or be a "dealer" in its mortgage loans
and will therefore hold its loans as a portfolio lender for a longer period.
35
<PAGE> 40
HEDGING
It is anticipated that the Mortgage Conduit Business will primarily
originate or purchase variable rate mortgage loans which do not carry the
inherent interest rate risk of fixed-rate loans. It is anticipated that a large
portion of the mortgage loans held by that Mortgage Investment Business will
carry fixed rates, a portion of which will have relatively short maturities. As
the production of fixed-rate mortgage loans increases, it is anticipated that
various hedging strategies will be implemented to provide protection against
interest rate risks. The nature and quantity of hedging transactions will be
determined by the Management based on various factors, including market
condition, the expected volume of mortgage loan originations and purchases and
the period of time required to accumulate and to sell mortgage loans.
However, an effective hedging strategy is complex and no hedging
strategy can completely insulate the Mortgage Conduit Business from interest
rate risks. In addition, hedging involves transaction and other costs, and such
costs could increase as the period covered by the hedging protection increases
or in period of rising and fluctuating interest rates. Therefore, the Mortgage
Conduit Business may be prevented from effectively hedging its interest rate
risks, without significantly reducing its return on equity.
LOAN SERVICING
Servicing. The Trust through its Mortgage Investment Business and the
planned Mortgage Conduit Business currently plans to originate or purchase all
mortgage loans on a servicing released basis, thereby acquiring the servicing
rights. The Mortgage Conduit Business plans to subcontract and the Mortgage
Investment Business currently subcontracts all of its servicing obligations for
loans to CAAI during the loan accumulation period pursuant to a servicing
agreement containing fees and other terms that are comparable to industry
standards. CAAI will service all of the loans of the Mortgage Investment
Business under a servicing contract. (See "Management - The Manager: Loan
Origination and Loan Servicing Agreement").
Delinquencies and Foreclosures. Loans originated or purchased by the
Mortgage Investment Business and the planned Mortgage Conduit Business will be
secured by mortgages, deeds of trust, security deeds or deeds to secure debt,
depending upon the prevailing practice in the state in which the property
securing the loan is located. Depending on local law, foreclosure will be
effected by judicial action or nonjudicial sale, and will be subject to various
notice and filing requirements. In general, the borrower, or any person having a
junior encumbrance on the real estate, may cure a monetary default by paying the
entire amount in arrears plus other designated costs and expenses incurred in
enforcing the obligation during a statutorily prescribed reinstatement period.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorneys fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
may be required to pay the loan in full to prevent the scheduled foreclosure
sale.
Although foreclosure sales are typically public sales, third-party
purchasers rarely bid in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashiers
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the sum of the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending on market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property.
COMPETITION
The Trust, in both its Mortgage Investment Business and its Mortgage
Conduit Business will face considerable competition in the business of
originating, purchasing and selling mortgage loans. Traditional competitors in
the financial services business include other mortgage banking companies,
commercial banks, credit unions, thrift institutions, private lenders, credit
card issuers and finance companies. Many of these competitors in the consumer
finance business are substantially larger and have considerably greater
financial, technical and marketing resources than the Trust. In addition, many
financial services organizations have formed national loan origination networks
that are substantially similar to the loan origination programs contemplated by
the Trust. Competition can take many forms including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and terms of
the loan, and interest or crediting rates.
36
<PAGE> 41
In addition, the current level of gains realized by the Mortgage Conduit
Business and its competitors on the sale of non-conforming loans could attract
additional competitors into this market with the possible effect of lowering
gains on future loan sales.
The Trust believes that it will be able to compete in both its Mortgage
Investment Business and its Mortgage Conduit Business on the basis of providing
prompt and responsive service and flexible underwriting for independent mortgage
brokers and correspondents to offer to their customers.
REGULATION
The operations of the Mortgage Conduit Business and the Mortgage
Investment Business are subject to extensive regulation, supervision and
licensing by federal, state and local government authorities. Regulated matters
include, without limitation, loan origination, credit activities, maximum
interest rates and finance and other charges, disclosure to customers, the terms
of secured transactions, the collection, repossession and claims handling
procedures utilized by the Mortgage Investment Business and Mortgage Conduit
Business, multiple qualification and licensing requirements for doing business
in various jurisdictions and other trade practices.
The Trust's loan origination activities in both of its businesses are
subject to the laws and regulations in each of the states in which those
activities are conducted. The Trust's activities as a lender in both of its
businesses are also subject to various federal laws including the Truth in
Lending Act, the Real Estate Settlement Procedures Act, the Equal Credit
Opportunity Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act
and the Fair Housing Act.
The Truth in Lending Act ("TILA") and Regulation Z promulgated
thereunder contain disclosure requirements designed to provide consumers with
uniform, understandable information with respect to the terms and conditions of
loans and credit transactions in order to give consumers the ability to compare
credit terms. TILA also guarantees consumers a three day right to cancel certain
credit transactions including loans of the type originated by the Trust.
Management of the Trust believes that it is in compliance with TILA in its
existing Mortgage Investment Business in all material aspects.
In September 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act") was enacted. Among other things, the
Riegle Act makes certain amendments to TILA. The TILA amendments, which became
effective in October 1995, generally apply to mortgage loans, such as some of
the Home Equity Loans made or held by the Mortgage Investment Business, with (i)
total points and fees upon origination in excess of eight percent of the loan
amount or (ii) an annual percentage rate of more than ten percentage points
higher than U.S. treasury securities of comparable maturity ("Covered Loans"). A
substantial number of the loans originated or purchased by the Trust's Mortgage
Investment Business are or can be expected to be Covered Loans.
The TILA amendments impose additional disclosure requirements on
lenders originating Covered Loans and prohibit lenders from originating Covered
Loans that are underwritten solely on the basis of the borrowers' home equity
without regard to the borrowers' ability to repay the loan. The Trust believes
that only a small portion of loans it originated are of the type that, unless
modified, would be prohibited by the TILA amendments. The Trust's underwriting
criteria take into consideration the borrowers' ability to repay.
The TILA amendments also prohibit lenders from including prepayment fee
clauses in Covered Loans to borrowers with a debt-to-income ratio in excess of
50% or Covered Loans used to refinance existing loans originated by the same
lender. The Trust did not collect prepayment fees on loans originated in its
Mortgage Investment Business prior to the effectiveness of the TILA amendments
and does not currently utilize pre-payment penalties in connection with its Home
Equity Loans. The TILA amendment imposes other restrictions on Covered Loans,
including restrictions on balloon payments and negative amortization features,
which the Trust does not believe will have a material impact on its operations.
The Trust is also required to comply with the Equal Credit Opportunity
Act of 1974, as amended ("ECOA"), which prohibits creditors from discriminating
against applicants on the basis of race, color, sex, age or marital status.
Regulation B promulgated under ECOA restricts creditors from obtaining certain
types of information from loan applicants. It also requires certain disclosures
by the lender regarding consumer rights and requires lenders to advise
applicants of the reasons for credit denial. In instances where the applicant is
denied credit or the rate or charge for loans increases as a result of
37
<PAGE> 42
information obtained from a consumer credit agency, another statute, the Fair
Credit Reporting Act of 1970, as amended, requires lenders to supply the
applicant with the name and address of the reporting agency. The Trust is also
subject to the Real Estate Settlement Procedures Act and is required to file an
annual report with the Department of Housing and Urban Development pursuant to
the Home Mortgage Disclosure Act.
In the course of its business, the Trust in both of its businesses, may
acquire properties securing loans that are in default. While the Trust will
inquire as to presence of hazardous substances, there is a risk that hazardous
or toxic waste could be found on such properties. In that event, the Trust could
be held responsible for clean-up or removal costs, which costs could exceed the
value of the underlying property.
Because the Trust's business is highly regulated, the laws, rules and
regulations applicable to the Trust are subject to regular modifications and
change. There are currently proposed various laws, rules and regulations which,
if adopted, could impact the Trust. There can be no assurance that these
proposed laws, rules and regulations, or other such laws, rules or regulations,
will not be adopted in the future which could make compliance much more
difficult or expensive, restrict the Trust's ability to originate, broker,
purchase or sell loans, further limit or restrict the amount of commissions,
interest and other charges earned on loans originated, brokered, purchased or
sold by the Trust, or otherwise affect the business or prospects of the Trust.
EMPLOYEES
The Manager employs and provides all of the persons required for the
operation of the Trust and its Mortgage Investment Business. At May 1, 1996, the
Manager employed 7 persons plus several contract personnel. Additional employees
will be required to staff the Mortgage Conduit Business. None of the Manager's
employees is subject to a collective bargaining agreement. The Manager believes
that its relations with its employees are satisfactory.
PROPERTIES
The Trust's and its Manager's executive and administrative offices are
located at 50 California Street, Suite 2020, San Francisco, California, 94111,
and consist of approximately 3,000 square feet.
The Manager also leases space for its two branch offices on a
short-term basis.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than those
arising in the ordinary course of its business, i.e. appointments of receivers
in foreclosure proceedings and motions to lift the automatic stay against a
borrower's bankruptcy proceeding.
38
<PAGE> 43
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
There are five directors of the Trust, two of whom (Messrs. Brooks and
Blomberg) are not affiliated with the Trust, its officers and directors or its
Manager. The directors and officers and their principal occupations and relevant
affiliations during the last five years or more are set forth below.
DIRECTORS AND OFFICERS
Thomas B. Swartz, 64; Chairman and Chief Executive Officer(15)
Chairman and Chief Executive Officer, Capital Alliance Advisors, Inc.
(1989 to date); Chairman, Capital Alliance Income Trust I (1991 to 1996) and
Capital Alliance Income Trust II (1994 to 1996); Chairman, Sierra Capital
Acceptance (1995 to date); Chairman and Chief Executive Officer of Sierra
Capital Companies and its Affiliates (1980 to date); Founder Chairman, Chief
Executive Officer and Trustee of seven equity real estate investment trusts
(1980-1991); Attorney at Law, Thomas Byrne Swartz, Inc. (1980 to date), and
Bronson, Bronson, & McKinnon, San Francisco, California (Partner 1960- 1980);
Past President (1989-1990) and Member, Board of Governors (1983 to 1993),
National Association of Real Estate Investment Trusts; Director (representing
Federal Deposit Insurance Corporation) of two subsidiaries of American
Diversified Savings Bank (in liquidation) (1990 to 1992)Member, Real Estate
Advisory Committee to California Commissioner of Corporations (1972-1973);
University of California at Berkeley Boalt School of Law, L.L.B. 1959;
Lieutenant, U.S.N.R. 1954-1956 (active) and to 1977 (reserve); Yale University,
A.B. 1954.
Dennis R. Konczal, 46; President, Director and Chief Operating Officer(15)(16)
President (1996 to date) and Executive Vice President (1989 to 1996)
and Chief Operating Officer, Capital Alliance Advisors, Inc.; Executive
Vice-President, Trustee and Chief Operating Officer of Capital Alliance Income
Trust I (1991 to 1996)and of Capital Alliance Income Trust II (1994 to 1996);
President and Director, Sierra Capital Acceptance (1995 to date); President,
Director and Chief Operating Officer of Sierra Capital Companies and of Capital
Alliance Investments Incorporated (a NASD broker-dealer and Registered
Investment Advisor) (1984 to date); Director, President and Chief Operating
Officer, Granada Management Corporation and Granada Financial Services, Inc.,
agribusiness concerns (1981-1984); Licensed Principal, NASD (1981 to date); B.S.
Agricultural Economics, Michigan State University (1972).
Douglas A. Thompson, 52; Executive Vice-President, Director and Chief Investment
Officer(16)
Executive Vice-President, Capital Alliance Advisors, Inc. (1995 to
date); Trustee, Capital Alliance Income Trust I and Capital Alliance Income
Trust II (1995 to 1996); Founder, First Blackhawk Financial, Inc. (mortgage
banking firm) (1992 to 1995); Owner, The Paradigm Group and Investors Mortgage
Exchange, Danville, California (whole loan brokerage for private and
institutional clients) (1990 to date); Vice President, Principal Residential
Advisors, Danville, California (1988 to 1990); Secondary Mortgage Specialist,
Morgan Stanley & Co. (1985-1988); Investment Banking/Mortgage Specialist,
Merrill Lynch Pierce Fenner & Smith, Los Angeles, California (1982 to 1985 );
Manager. Watson Mortgage, Bakersfield, California (1981 to 1982); California
Real Estate Broker (1992 to date); Member, Pepperdine University Board (1988 to
1991); B.S.E., 1967, Abeline Christian University; M.A., 1969 University of
Southern California.
Stanley C. Brooks, 46; Director(16)(17)
President and Chairman, Brookstreet Securities Corporation (1970 to
date); Executive Vice-President, Toluca Pacific Securities Corporation (1987 to
1989); Senior Vice-President, First Affiliated Securities (1983 to 1989); Senior
Vice-President, Private Ledger Financial Services (1976 to 1983); Member,
National Futures Association (1991 to date);
- --------
(15) Executive Committee
(16) Audit Committee
(17) Unaffiliated Directors
39
<PAGE> 44
Member, Securities Industry Association (1995 to date); Member, Regional
Investment Bankers Association (1990 to date); Licensed Principal, NASD (1970 to
date); California State Polytechnic Institute, B.S. Business Administration
1970.
Harvey Blomberg, 56; Director(15)(17)
Founder and principal MRHB Real Estate (real estate management company)
(1988 to date); Regional Director, Connecticut Small Business Development Center
(19__ to date); Partner and Chief Financial Officer, Bay Purveyors, Inc. (1976
to 1995); General Manager, Deerfield Communications (1987 to 1990); Consultant
to numerous companies (financial restructuring, refinancing and marketing) (1989
to date). Renessler Polytechnic Institute, M.S. Management, 1995; Hofstra
University, M.B.A. 1985; B.S. Engineering, 1966.
Directors are divided into three classes. Each class, after its initial
re-election will serve 3 year terms. The Class One directors will be re-elected
in 1997, the Class Two directors in 1998 and the Class Three directors in 1999.
Replacements for vacancies occurring among the Directors may be filled by the
Board of Directors. Nominations for Directors when a Director is removed or
withdraws may be made by the Board of Directors, or subject to certain
conditions, by a Shareholder holding 10% or more of the Shares outstanding.
Initially, the Trust intends to pay to each Unaffiliated Director an
annual fee of $5,000 plus $500 for each director's or committee meeting of the
Directors attended in person ($300 if any are attended by telephonic means) and
to reimburse all Unaffiliated Directors for their travel expenses and other
out-of-pocket disbursements incurred in connection with attending any such
meeting and for carrying on the business of the Trust. It is estimated that the
aggregate remuneration so payable (exclusive of reimbursement for expenses ) to
the Unaffiliated Directors for the first full fiscal year of the Trust (i.e.,
calendar year 1997) will not exceed $17,000. Directors who are affiliated with
the Manager will receive no compensation from the Trust for their service as
Directors. The officers of the Trust who are Directors and are also officers and
directors of the Manager, however, will be reimbursed by the Trust or its
subsidiaries for their expenses in attending meetings of the Directors or an
Executive Committee and in carrying on the business of the Trust, and may be
compensated in the future by the Trust or its subsidiaries for other services
performed for the Trust under separate agreements.
The Bylaws provide that the Directors and the Trust's agents, officers
and employees may engage with or for others in business activities of the types
conducted by the Trust and that they will not have any obligation to present to
the Trust any investment opportunities which come to them other than in their
capacities as Directors regardless of whether those opportunities are within the
Trust's investment policies. Each Director is required to disclose any interest
he has, and any interest known to him of any person of which he is an Affiliate,
in any investment opportunity presented to the Trust. (See "Risk Factors":
"Conflicts of Interest and Related Considerations and Business Risks and Related
Considerations - Limited Liability of Directors and Possible Inadequacy of
Remedies", and "Summary of Organizational Documents and Securities" regarding
the extent to which the Bylaws provide for indemnification, and prohibit or
permit transactions between the Trust and the Directors, the Manager and certain
of their Affiliates).
The Directors have designated an Audit Committee which will be
responsible for general relations between the Trust and its Independent Auditors
as well as overseeing the annual audit of the Trust's financial statements. The
Audit Committee is composed of Mr. Brooks, an Unaffiliated Director, Mr.
Thompson and Mr. Konczal.
The Directors have also designated an Executive Committee which has the
authority of the full Board except for the declaration of dividends and other
non-delegable matters specified in the Delaware Corporations Law. The Executive
Committee is composed of Messrs. Swartz, Konczal, and Blomberg, an Unaffiliated
Director.
Neither the Board of Directors in the aggregate, nor any Director individually,
owns beneficially in excess of 1% of either the Trust's Preferred Stock or its
Common Stock.
40
<PAGE> 45
THE MANAGER
Capital Alliance Advisors, Inc., a California Corporation, is the
Manager of the Trust to coordinate assist and manage the duties and
responsibilities of the Trust, subject to the supervision of the Board of
Directors, - all in accordance with the terms of the Management Agreement. The
Manager and its principals have collectively had substantial experience in the
origination, servicing and administration of Home Equity Loans and other
mortgage loans secured by trust deeds, in real estate asset management and
financing, and in providing investment advisory services as a real estate
investment fiduciary to both public and private real estate investment programs.
The Manager, from 1991 through 1996, managed and advised The Trust's
predecessors, Capital Alliance Income Trust I ("CAIT I") and Capital Alliance
Income Trust II ("CAIT II"). CAIT I and CAIT II were consolidated with Capital
Alliance Income Trust, A Real Estate Investment Trust, ("Trust") on April 30,
1996. The Manager is a licensed real estate broker in California and also
manages a private mortgage banking firm with investment criteria similar to
those of the Trust. The Manager owns beneficially 1% of the Trust's Preferred
Stock.
Messrs. Swartz and Konczal, principals of the Manager, are also
principals and Chairman and President, respectively, of SCA, a privately-owned
wholesale residential mortgage banking firm which specializes in B-C
credit-rated residential mortgage loans. SCA was founded in 1995 and is located
in Irvine, California. The Trust holds a strategic investment in SCA as holder
of preferred shares which are valued at $200,000 and which have yielded a 15%
return thereon to date.
Messrs. Swartz and Konczal, principals of the Manager, are also
principals of Sierra Capital Companies ("Sierra Capital"), and have been
extensively engaged since 1980 in various aspects of the real estate investment
advisory, asset management, and finance business. From 1985 to 1990, Sierra
Capital advised and managed (i) four publicly-held equity real estate investment
trusts ("Sponsored REITs") and (ii) Advantage Corporate Income Fund, L.P.
("Advantage Fund"), an institutional real estate limited partnership. Sierra
Capital sold its REIT advisory and property management businesses to the
Sponsored REITs in 1991 and the Sponsored REITs became "self administered. Since
April 1991, neither Sierra Capital nor Messrs. Swartz and Konczal have had any
connection or affiliation with the Sponsored REITs. Sierra Capital and its
Affiliates have arranged over $410 million in credit facilities for sponsored
entities and for their own account, including the Sponsored REITs and Advantage
Fund. Sierra Capital and its Affiliates currently manage for their own account
and for Advantage Fund, approximately $50 million of warehouse/distribution and
light industrial properties. Advantage Fund, as of December 31, 1995 had
$13,070,197 in partner's capital, seven single-tenant warehouse distribution
facilities and two single-tenant retail warehouse facilities totaling 685,768
and 171,762 square feet, respectively, that were 100% leased. The facilities are
located nationally. Sierra Capital directly owns two light industrial properties
totaling 257,450 square feet which were 88% leased. Additionally, Messrs. Swartz
and Konczal are also directors and officers of Capital Alliance Investments,
Inc., a wholly-owned subsidiary of Sierra Capital, is a registered investment
advisor and broker-dealer.
The Sponsored REITs were Sierra Capital Realty Trust IV Co. ("Trust
IV"), Sierra Capital Realty Trust VI Co. ("Trust VI"), Sierra Capital Realty
Trust VII Co. ("Trust VII"), and Sierra Capital Realty Trust VIII Co. ("Trust
VIII"). Trusts IV, VI and VII were consolidated in 1995 into Meridian Industrial
Trust ("MIT"), and Trust VIII in 1993 changed its name to Meridian Point Realty
Trust VIII Co. MIT and Trust VIII are presently registered pursuant to Section
12g of the Securities Exchange Act of 1934 and are subject to its reporting,
proxy and trading rules. The Sponsored REITs and Advantage Fund are separate and
distinct from the Trust and neither the Manager nor its Affiliates has, (nor
since 1991 has had), any continuing relationship with MIT or Trust VIII, other
than as a shareholder. As of December 31, 1995 MIT and Trust VIII had
approximately $177,092,000 and $43,041,290, respectively, in Shareholders
Equity. At December 31, 1995 MIT had 49 warehouse distribution facilities, 28
light industrial facilities and 7 retail facilities aggregating 5,823,391
rentable square feet, 1,531,876 rentable square feet and 903,082 rentable square
feet, respectively that were 94%, 92% and 94% leased, respectively. Trust VIII,
at said date, had 1 office building and 23 warehouse distribution facilities
that were 99% leased. The properties are located nationally, primarily in major
distribution centers. MIT is traded on the New York Stock Exchange and Trust
VIII is traded on the American Stock Exchange. Information regarding MIT and
Trust VIII was obtained from their respective December 31, 1995 IO K filings
with the Securities Exchange Commission.
41
<PAGE> 46
Mr. Thompson, a principal of the Manager, holds a California Department
of Real Estate Broker's license, and has been involved in the mortgage industry
since 1976. During his service with the Capital Markets, Institutional Sales
Division of Merrill, Lynch, Pierce, Fenner & Smith in Los Angeles and as a
secondary mortgage specialist with Morgan Stanley & Co. in San Francisco, Mr.
Thompson was involved in the purchase and sale of over $1 billion of mortgage
products.
The principal office of the Manager is 50 California Street, Suite
2020, San Francisco, California 94111 (Tel: (415) 288-9575).
The directors and executives officers of the Manager and their
principal occupations during the past five years are as follows:
<TABLE>
<S> <C>
Thomas B. Swartz* Chairman and Chief Executive Officer
See "Directors and Officers," above.
Dennis R. Konczal* Director, President and Chief Operating Officer
See "Directors and Officers," above.
Douglas A. Thompson* Director, Executive Vice-President and Chief Investment Officer
See "Directors and Officers," above.
</TABLE>
Terri L. Diver, 40; Vice President, Director of Loan Production
Vice President, Capital Alliance Advisors, Inc. (1993 to date); General Manager,
San Diego Office (1988 to date), Acting Chief Executive Officer, Mission Thrift
and Loan Association (1987-1988) and General Manager, El Cajon Office (1984-
1987), American Income Trust; Assistant Manager and Thrift Supervisor, Beverly
Hills and San Diego Offices, Foothill Thrift and Loan Association (1980 to
1984); Thrift Supervisor, Credit Investigator, Thrift Teller (1975-1980) for
First Thrift of America, Inglewood Thrift and Loan Association, Foothill Thrift
and Loan Association and Amfac Thrift and Loan Association; High School
Graduate, 1974, and Management and Continuing Education Courses and Seminars.
Rosemarie Franceschi, 47; Vice-President and Chief Lending Officer
Vice President, Capital Alliance Advisors, Inc. (1993 to date); Vice President,
EquityAide Real Estate Finance Corporation (1983 to 1995); Founder and Manager,
Robertson Mortgage Company (1981-1982); Loan Officer, Loan Servicing and Vault
Teller, Eureka Savings & Loan Association (1966-1981); High School Graduate and
Management and Continuing Education Courses and Seminars.
Jeannette Hagey, 38; Controller
Controller, Capital Alliance Advisors, Inc. (1994 to date); Controller, Sierra
Capital Companies and Affiliate (1994 to date); Accounting Manager, VCA Hills
(subsidiary of Colgate-Palmolive) (1991 to 1993); Senior Accountant, Cygnet
Systems (1988 to 1991); Senior Accountant, Hare Brewer and Kelley (1985 to
1988); Accountant, Squaw Valley Ski Corporation (1984 to 1985); San Jose State
University, B.S. Business-Accounting (1983); Management and Continuing Education
Courses and Seminars.
Linda St. John, 40; Secretary and Operations Officer
Operations Officer and Secretary, Capital Alliance Advisors, Inc. (1995 to
date); Secretary, Sierra Capital Companies and Affiliates (1995 to date);
* Also officers and directors of the Trust.
42
<PAGE> 47
MANAGEMENT AGREEMENT
The Management Agreement between the Trust and the Manager will be
effective upon the effective date of this Offering for an initial term ending
December 31, 1998. The term of the Management Agreement will be automatically
renewed for an additional two year term subject to the approval of the holders
of a majority of the outstanding Common and Preferred Shares unless a notice of
non-renewal is given by the Trust at least 120 days prior to the end of the term
or any extension thereof and such termination is approved by the holders of a
majority of the outstanding Common and Preferred Shares. Either the Board of
Directors, Shareholders holding a majority of the Common and Preferred Shares
and the Manager may also terminate the Management Agreement without cause upon
120 days prior written notice to the other party. The Trust or the Manager may
also terminate the Management Agreement for cause upon the occurrence of certain
specified events including a material breach of the Agreement or other breach of
the Agreement by the Manager which remains uncured for 60 days. Any such
termination or failure to extend by the Trust without cause will result in the
payment of a termination or non-renewal fee to the Manager determined by
independent appraisals of the fair market value of the Agreement assuming its
continuance for a two year term.
The Manager will be subject to the supervision of the Trust's Board of
Directors and will provide investment, management and advisory services to the
Trust, including (a) the presenting of a continuing and suitable investment
program consistent with the Trust's investment policies and objectives and (b)
the supervision and management of the day-to-day operations of the Trust.
The Management Agreement provides for a regular management fee for its
regular management and advisory services ("Management Compensation"), and for
the retention of independent contractors (including the Manager or its
affiliates) to perform loan origination and loan servicing services. (See
"Management: Management Compensation")
The Manager as of August 1, 1996 had a total of seven officers and
directors plus several contract personnel dedicated to the oversight and conduct
of the Trust's operations.
MANAGEMENT COMPENSATION
The Manager will be entitled to a per annum Regular Management Fee
payable monthly in arrears of an amount equal to 1% of the Gross Mortgage Assets
of the Trust (computed monthly) plus 1/2% of cash or money-market or equivalent
assets.
The Manager (including its principals) is also entitled to receive
additional compensation for services rendered to the Trust pursuant to separate
agreements approved by the Board of Directors, including compensation for loan
origination and loan servicing services and for additional services rendered
under separate contracts with the Trust or its subsidiaries, including the
Mortgage Conduit Subsidiary.
MANAGEMENT EXPENSES
Pursuant to the Management Agreement, the Trust will also pay all
operating expenses of the Trust except those specifically required to be borne
by the Manager under the Management Agreement. The operating expenses required
to be borne by the Manager include the compensation and other employment costs
of the Manager's controlling officers and directors in their capacities as such,
and the cost of office space, utilities, telephones, furnishings and other
office expenses incurred or allowable to the Manager for its own benefit and
account and not required for oversight and management of the Trust's operations.
The expenses that will be paid by the Trust will include issuance and
transaction costs incident to the acquisition, disposition and financing of
investments; regular legal and auditing fees and expenses of the Trust; fees and
expenses of the Trust's directors, premiums of directors' and officers'
liability insurance and fidelity and errors and omissions insurance; servicing
and origination expenses payable under the Origination and Loan Servicing
Agreement; expenses connected with investor relations and communications,
payment of dividends, transfer and registration of securities and other ordinary
and necessary expenses of the business and affairs of the Trust. Expenses
incurred by the Manager (including allocations of employment expenses and
overhead) which are the responsibility of the Trust will be reimbursed at cost
and will be made monthly.
43
<PAGE> 48
In addition to expenses payable by the Trust under the Management
Agreement, the Trust is responsible for all expenses (including legal, auditing,
and other expenses) in connection with this offering, estimated at $600,000.
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and will
not be responsible for any action of the Trust's Board or shareholders and
employees, will not be liable to the Trust, any mortgage security issuer, any
subsidiary of the Trust, the Unaffiliated Directors, the Trust's stockholders or
any subsidiary's shareholders for acts performed in accordance with and pursuant
to the Management Agreement, except by reason of acts or omissions constituting
bad faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. The Manager does not have significant
assets. Consequently, there can be no assurance that the Trust would be able to
recover any damages for claims it may have against the Manager. The Trust has
agreed to indemnify the Manager, and its directors, officers, Shareholders and
employees with respect to all expenses, losses, damages, liabilities, demands,
charges and claims arising from any acts or omissions of the Manager made in
good faith in the performance of its duties under the Management Agreement. (See
"Risk Factors - Relationship with Manager and its Affiliates; Conflicts of
Interest" and "Limited Liability of Directors and Indemnification").
HOME EQUITY LOAN ORIGINATION AND LOAN SERVICING AGREEMENT
The Home Equity Loan Origination Services and Loan Servicing Agreement
("Origination and Servicing Agreement") between the Trust and CAAI will be
effective upon the effective date of this Offering for an initial term ending
December 31, 2000. The term of the Origination and Servicing Agreement and any
extension thereof will be automatically renewed for an additional term of four
years unless a notice of non-renewal is given by the Trust at least six months
prior to the end of the term or extension. In addition, the Trust may terminate
the Origination and Servicing Agreement upon the occurrence of certain specified
events, including a violation of the Agreement which remains uncured for thirty
days.
CAAI will use its best efforts to originate and present to the Trust
Home Equity Loans, other mortgage loans, and other investment opportunities
which may be committed and funded only when approved by the Manager's Investment
Committee. CAAI will also use its best efforts to service the Trust's portfolio
of Home Equity Loans and to manage and dispose of any foreclosure property of
the Trust.
CAAI will be entitled to receive for its services under the Origination
and Servicing Agreement a per annum combined Origination and Servicing Fee
payable monthly of two percent (2%) of the Gross Mortgage Assets of the Trust,
computed monthly. All "origination points" received in connection with a Home
Equity Loan shall be payable to the Trust which shall pay any compensation due
with respect to a loan to a cooperating broker. CAAI shall also be entitled to
retain miscellaneous fees paid by borrowers for appraisal, documentation,
processing, underwriting and funding of Home Equity Loans and auxiliary fees
related to the servicing of such loans, including late charges, returned check
fees, assumption fees and other incidental fees permitted by the loan documents.
ORIGINATION AND SERVICING EXPENSES
Pursuant to the Origination and Servicing Agreement, CAAI will bear the
employment expenses of its officers, directors and employees of CAAI in their
capacities as such and expenses incidental to the origination and servicing of
Home Equity Loans to the extent such expenses are paid by borrowers in
connection with any loan. CAAI retains payments of miscellaneous auxiliary fees
paid by borrowers for such expenses; the cost of office space, utilities,
telephones, furnishings and other office expenses incurred and allocable to CAAI
for its own benefit and account and not required for the origination or
servicing of the Trust's Home Equity Loans and other mortgage loans. Expenses
that will be paid by the Trust include travel expenses to inspect properties
that are proposed as the subject of a Home Equity Loan; fees and expenses paid
to independent contractors, appraisers, consultants and other agents retained by
the Trust and direct expenses of acquiring, financing, servicing, disposing of
and owning interests in real estate and other property; and the expenses of
foreclosing upon, managing, owning and selling foreclosure properties and other
property of the Trust.
CAAI is a licensed real estate broker and its principal office is
located at 50 California Street, Suite 2020, San Francisco, California 94111
(Tel: (415) 288-9575).
44
<PAGE> 49
- --------------------------------------------------------------------------------
RELATIONSHIPS WITH AFFILIATES
- --------------------------------------------------------------------------------
ARRANGEMENTS AND TRANSACTIONS WITH CAAI.
CAAI is the Manager of the Trust and will provide (a) management and
advisory services to the Trust in accordance with the Management Agreement and
(b) mortgage origination and loan servicing services to the Trust in accordance
with the Mortgage Origination and Servicing Agreement. As previously described,
the Trust will utilize the mortgage banking experience, management expertise and
resources of CAAI in conducting its Mortgage Investment and its planned Mortgage
Conduit Businesses. CAAI owns 1% of the Preferred Shares of the Trust. In
addition, a majority of the Directors and the officers of the Trust also serve
as Directors and/or officers of CAAI. (See "Risk Factors - Conflicts of Interest
and Related Considerations Relationship with CAAI and Affiliates"). On formation
of the Mortgage Conduit Subsidiary, CAAI will own all of the voting common stock
and a 1% economic interest in the Mortgage Conduit Subsidiary. The Trust will
own all of the non-voting preferred stock representing 99% of the economic
interest in the Mortgage Conduit Subsidiary. CAAI will have the power to elect
all of the directors of the Mortgage Conduit Subsidiary and the ability to
control the outcome of all matters for which the consent of the holders of the
common stock of such subsidiary is required. CAAI and/or the officers and
directors of the Mortgage Conduit Subsidiary will be separately compensated for
their management services to the subsidiary and will provide origination,
financing and administrative services to the subsidiary through separate
agreements and an intercompany allocation of the cost of such services.
The Management Agreement may be terminated by (i) either the Trust, its
Board of Directors or shareholders holding a majority of the voting power of the
Trust, or by the Manager without cause upon 120 days prior written notice and
(ii) approval of the termination of the Manager by the Shareholders holding a
majority of the Common and Preferred Shares. Any such termination or failure to
extend by the Trust, the Board of Directors or Shareholders without cause shall
result in the payment of a termination or non-renewal fee to the Manager
determined by an independent appraisal of the fair market value of the
Management Agreement assuming a two year term. These agreements have been
developed by CAAI and the Trust in the context of a related party consolidation
and therefore are not the result of arm's-length negotiations between
independent parties. It is the intention of the Trust and CAAI that such
agreements and the transactions provided for therein, taken as a whole, are fair
to both parties, while continuing certain mutually beneficial arrangements.
However, there can be no assurance that each of such agreements, or the
transactions provided for therein, have been effected on terms at least as
favorable to the Trust as could have been obtained from unaffiliated third
parties.
INVESTMENT IN RELATED MORTGAGE BANKING FIRM.
The Trust, as a result of strategic investments totaling $200,000 by its
predecessors, CAIT I and CAIT II, holds 20,000 Class "B" Preferred Shares of
Sierra Capital Acceptance ("SCA") of Irvine, California. SCA is a wholesale
mortgage banking firm specializing in B-C credit rated non-conforming
residential mortgages. The SCA investment held by the Trust has a 15%
distribution preference (which has been paid quarterly) and a liquidation
preference. The business of SCA and the Mortgage Conduit Business planned for
the Trust's Mortgage Conduit Subsidiary are similar and may be competitive in
the origination, purchasing and sale of A- and B-C credit rated non-conforming
residential mortgages unless the Mortgage Conduit Business is conducted through
a joint venture between SCA and the Mortgage Conduit Subsidiary. Messrs. Swartz
and Konczal are principals, directors and officers of SCA as well as of the
Trust and its Manager. No decision has been made to date regarding the
establishment of a joint venture between SCA and the Trust's proposed Mortgage
Conduit Subsidiary.
SALE AND PURCHASE OF LOANS.
To assure a source of mortgage loans for the Trust's Mortgage Investment
Business, it is anticipated that the Mortgage Conduit Subsidiary will grant to
the Trust an option to purchase all non-conforming mortgage loans and Home
Equity Loans meeting the Trust's investment criteria and policies. Commitments
to acquire loans will obligate the Trust to purchase such loans from the
Mortgage Conduit Subsidiary upon the closing and funding of the loans, pursuant
to the terms and conditions specified in the commitment. It is also anticipated
that compensation to be paid by the Mortgage Conduit Subsidiary to the Trust
will be no less favorable to the Trust than is generally available from other
nationally-recognized dealers in similar mortgage loans as approved by the Board
of Directors.
45
<PAGE> 50
Such a loan purchase agreement would generally remain in force until one
year after the effective date of this Offering and thereafter would be
automatically renewed on a year-to-year basis unless written notice is delivered
by either the Trust or the Mortgage Conduit Subsidiary thirty day prior to the
end of the term or any renewal term of such an agreement.
Also, the Trust would be able to terminate the loan purchase agreement
upon 30 days' notice following the happening of one or more events specified in
the agreement. Such events would relate generally to the Mortgage Conduit
Subsidiary's proper and timely performance of its duties and obligations under
the agreement. In addition, either party would be able to terminate the loan
purchase agreement without cause upon 30 days' notice.
Additional or modified arrangements and transactions may be entered into
by the Trust, CAAI, and their respective subsidiaries or Affiliates, after
completion of this Offering. Any such future arrangements and transactions will
be determined through negotiation between the Trust and such entities and it is
possible that conflicts of interest will be involved.
46
<PAGE> 51
- --------------------------------------------------------------------------------
SUMMARY OF ORGANIZATIONAL DOCUMENTS AND SECURITIES
- --------------------------------------------------------------------------------
The following is a summary of significant provisions of the Trust's
Certificate of Incorporation and Bylaws and a summary of the Trust's Shares and
Warrants. Additional significant provisions are summarized elsewhere in this
Prospectus. (See "Additional Information: and Sources of Additional Funds.")
DESCRIPTION OF SHARES.
Authorized Capital. The Trust's authorized capital stock consists of
2,000,000 Common Shares and 675,000 Preferred Shares. The Common Shares and
Preferred Shares each have a par value of $0.01. The Trust will not issue more
than 1,500,000 Common Shares during the initial offering period. 643,730
Preferred Shares were issued and outstanding at April 30, 1996. The number of
Warrants issued in the Initial Public Offering will vary depending upon the
amount of sales of Common Shares. Moreover, the extent to which such Warrants
are exercised and the timing of such exercises will affect the number of Common
Shares outstanding at any time.
Voting Rights. Each Preferred and Common Share is generally entitled to
one vote on all matters to be voted upon by the shareholders. The shareholders
will have all the voting rights provided by the Delaware General Corporation Law
to shareholders of Delaware corporations (in addition to those described below),
and will be entitled to vote upon: (1) the election or removal of Directors; and
(2) the ratification of the Directors approval, renewal or termination of the
Management Agreement. As permitted by Delaware law, the Trust's Certificate of
Incorporation allows the Directors to amend the Trust's bylaws without
shareholder consent.
Further Issuance of Shares; Redemption Shares may be issued upon Warrant
exercise and the possible sale of additional Preferred Shares or Common Shares
or issuance of debt securities that are convertible into Preferred Shares or
Common Shares. (See "Sources of Additional Funds.:) Upon issuance, Shares will
be fully-paid and non-assessable and, except as stated under "Redemption of
Shares and Prohibition of Transfer of Shares and Exercise of Warrants" below,
shares (except as noted under "Redemption of Transfer of Shares and Exercise of
Warrants" below) will not be subject to redemption.
Annual Meeting of Shareholders. The first annual meeting of the
shareholders will be held following the close of the Trust's fiscal year ending
December 31, 1996. Special meeting may be called by the Chairman, the President,
at least two Directors, subject to certain conditions, or shareholders holding
10% or more of the outstanding Shares of the Trust.
Transferability of Shares. The Shares and Warrants will be freely and
separately transferable, except to the extent stated under "Redemption of Shares
and Prohibition on Transfer of Shares and Exercise of Warrants" below. The Trust
has applied for listing on the NASDAQ-NMS subject to official notice of
issuance, but actual trading of Shares on the NASDAQ-NMS, if approved, will not
commence until the termination of the Initial Public Offering. Other transfers
of Shares that do not involve a sale can be accomplished by providing the
necessary documentation to the stock transfer agent, _____________________.
Warrants will not be listed on the NASDAQ-NMS, but will be freely transferable,
except as set forth below.
Issuance of Share Certificates. The actual issuance of a certificate
evidencing the Shares is optional. Shareholders who do not elect to receive a
certificate will own Shares in "unissued certificate" form and will be treated
in like manner as those who do receive a certificate. Owning Shares in unissued
certificate form will (a) eliminate the physical handling and safekeeping
responsibilities inherent in owning transferable stock certificates, and (b)
eliminate the need to return a duly executed certificate to the transfer agent
to effect a transfer. After the Minimum Subscription Level is reached, all
Shares will be held in unissued certificate form until the end of the Initial
Public Offering period. Upon the conclusion of the offering, Share certificates
will be issued to those Shareholders who in writing have requested it.
DIVIDEND PREFERENCES.
Current Distributions. Holders of the Preferred Shares will be entitled
to the Current Distribution Preference with respect to such Current
Distributions as are declared each year as follows: the lesser of (a) an amount
equal to an annualized return on the Net Capital Contribution of Preferred
Shares at each dividend record date during such year (or, if the Directors
47
<PAGE> 52
do not set a record date, as of the first day of the month) equal to 10.25% or
150 basis points over the Prime Rate (determined on a not less than quarterly
basis), or (b) the amount available for distribution by the Trust.
After declaration for a given quarter of Current Distributions to the
holders of Preferred Shares in the amount of the Current Distribution
Preference, no further distributions may be declared on the Preferred Shares for
the subject quarter until the total dollar amount of Current Distributions
declared on the Common Shares as a class for that quarter equals an amount (the
"Matching Distribution") as the Current Distribution Preference for each
Preferred Share for such quarter. Any Current Distributions associated with a
payment date that are declared after the Trustees have declared Current
Distributions on Common Shares in the amount of the Matching Distribution (i.e.
excess Distributions) generally will be allocated such that the amount of
Current Distributions per share paid to or declared to the holders of the
Preferred Shares and Common Shares for the subject quarter are equal.
Liquidating Distributions. Holders of Preferred Shares are entitled to
receive all Liquidating Distributions until the Aggregate Adjusted Net Capital
Contribution of all Preferred Shares has been reduced to zero. Thereafter,
holders of Common Shares are entitled to all Liquidation Distributions until the
Aggregate Adjusted Net Capital Contributions of all Common Shares has been
reduced to zero. Any subsequent Liquidating Distributions will be allocated
among the holders of the Common shares and Preferred Shares pro rata.
DIRECTORS.
The Board of Directors consists of five members (two of whom are
unaffiliated directors) who are divided into three classes and will serve until
the first annual meeting of shareholders at which directors in their respective
classes are to be elected or until their successors are elected. Thereafter, the
term of each Director elected by the Shareholders will continue until the next
annual meeting of the shareholders at which directors in their respective
classes are to be elected. The number of Directors may be increased or decreased
by the Directors or the shareholders, but shall be not less than three nor more
than seven. Vacancies, which can be created by the death, resignation,
bankruptcy, adjudicated incompetence or other incapacity of a Director, or by an
increase in the number of Directors, may be filled by a majority of the
remaining Directors. Removal of a Director by the Shareholders or court order
may be filled only by shareholders. Any Director may resign at any time and may
be removed, with or without cause, by the holders of a majority of the Shares.
The Directors are empowered to appoint an Executive Committee of two or
more Directors to which may be delegated most of the powers of the Board of
Directors and an Audit Committee of two or more Directors.
The Directors will be entitled to be indemnified against all liabilities
incurred by them in the course of their activities as Directors except that no
indemnity will be provided for willful misconduct or for conduct that is
knowingly fraudulent or deliberately dishonest.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND BYLAWS.
Approval by shareholders owning a majority of the Shares represented by
shareholders present either in person or by proxy at a duly authorized meeting
may by affirmative vote amend or alter the Trust's Bylaws. Bylaws may also be
amended by the Board of Directors. Except as noted below, approval by
shareholders owning a majority of the outstanding Shares is necessary to amend
or alter the Trust's Certificate of Incorporation. Except as noted below, in
addition, no reduction in the voting rights of the holders of Trust Shares or in
their right to distributions on liquidation of the Trust may be made without
shareholder approval. The holders of two-thirds of the outstanding Preferred
Shares must approve any change in rights, privileges or preferences of Preferred
Shares from that set forth in the Trust's Bylaws and Certificate of
Incorporation or the creation of any additional class of preferred stock senior
to the Preferred Shares. The holders of a majority of the outstanding Preferred
Shares must approve the creation of any additional class of preferred stock
equal in preference to the Preferred Shares.
SHAREHOLDER LIMITED LIABILITY.
Under Delaware general corporate law, a shareholder will generally not be
liable for claims made against the Trust in the absence of a voluntary
assumption of liability.
48
<PAGE> 53
REDEMPTION OF SHARES AND PROHIBITION OF TRANSFER OF SHARES AND EXERCISE OF
WARRANTS.
The Preferred Shares are redeemable by a Shareholder at the option of the
Board of Directors annually on June 30 provided a request for such redemption by
a Preferred Shareholder is received by May 15 of such year. The Board of
Directors may arbitrarily and in their sole discretion deny, delay or postpone
or consent to any or all requests for redemption. The Redemption Amount to be
paid for redemption of such Preferred Shares shall be the Adjusted Net Capital
Contribution plus accrued but unpaid dividends attributable to the Preferred
Shares which the Preferred Shareholder requests be redeemed, divided by the
Aggregate Net Capital Contributions plus accrued but unpaid Dividends
attributable to all referred Shares outstanding, multiplied by the Net Asset
Value of the Trust attributable to the Preferred Shares which shall be that
percentage of the Trust's Net Asset Value that the Aggregate Adjusted Net
Capital Contributions of all Preferred Shares bears to the Adjusted Net Capital
Contributions of all Shares outstanding. A contingent liquidation charge will be
paid to the Trust in connection with each redemption as follows: 3% of
Redemption Amount in 1996; 2% of Redemption Amount in 1997; 1% of Redemption
Amount in 1998; and none thereafter.
With certain exceptions, for the Trust to qualify as a REIT under the
Code, not more than 50% of its outstanding Shares may be owned by five or fewer
individuals during the last half of the Trust's taxable year, and the shares
must be owned by 100 or more persons during at least 335 days of a taxable year
of twelve months or during a proportionate part of a shorter taxable year. The
Trust has over 100 Preferred Shareholders. (See "Tax Aspects of the Offering.")
In order to meet these requirements, the Trustees are given power to redeem or
prohibit the transfer of a sufficient number of Common and/or Preferred Shares
or the exercise of a sufficient number of Warrants to maintain or bring the
ownership of shares into conformity with those requirements and to prohibit the
Transfer of Shares to Persons whose acquisition thereof would result in a
violation of those requirements. In addition, the Bylaws provide that no
shareholder may own more than 9.8% of the total outstanding Shares, although
this limit will not apply to Shares acquired before the conclusion of the
Initial Public Offering of Common Shares.
REPORTS TO SHAREHOLDERS AND RIGHTS OF EXAMINATION.
Within 120 days following the close of each fiscal year, the Trust will
mail an annual report on Trust affairs to its shareholders. This report will
include audited financial statements and contain a balance sheet, an income
statement, a statement of changes in shareholder equity and a statement of
changes in financial position. The Trust will provide a proxy statement in
connection with the annual meeting. The Trust will send shareholders quarterly
reports on the affairs of the Trust. Financial statements in reports will be
prepared in accordance with generally accepted accounting principles. The
shareholders will have the right to inspect the books and records of the Trust
during usual business hours for any purpose reasonably related to such
shareholder's interest as a shareholder.
DESCRIPTION OF SHAREHOLDER AND MANAGING DEALER WARRANTS.
Each Shareholder Warrant will entitle the holder thereof to purchase one
Common Share. The exercise price for each Shareholder Warrant is $7.00, and such
Warrants may be exercised during the twenty-fifth through the forty-eighth month
following the effective date of this Prospectus. The Shareholder Warrants will
be issued pursuant to a Shareholder Warrant Agreement between the Warrant Agent
and the Trust.
Each Managing Dealer Warrant will entitle the holder thereof to purchase
one Common Share. The exercise price for each Managing Dealer Warrant is $9.00,
and such Warrants may be exercised during the twenty-fifth through the
forty-eighth month following the effective date of this Prospectus. The Managing
Dealer Warrants will be issued pursuant to an Managing Dealer Warrant Agreement
between the Warrant Agent and the Trust.
In order to protect Warrant holders against dilution, the Warrant
Agreement provides that upon the occurrence of certain events, the exercise
price of the Warrants and the number of Shares which may be purchased upon the
exercise of Warrants will be adjusted. The events generating adjustments include
stock dividends, split-ups, combinations and reclassifications, but do not
include the sale of Shares at less than the exercise price or cash distributions
whether paid out of capital or otherwise. Provision is also made to protect
against dilution in the event of merger, consolidation or disposition of all or
substantially all of the Trust's assets. Warrant holders do not have any rights
of shareholders and in the event of a partial or total liquidation, dissolution
or winding up of the Trust, holders of Warrants will not be entitled to
participate in
49
<PAGE> 54
a distribution of Trust assets unless such Warrants have been exercised. The
Shares and the Warrants may be transferred separately after their issuance.
Warrants will be dated and issued in certificate form to the shareholders upon
written request at the time of the warrant exercise period and they may be
exercised by completing and executing the form on the back side of the Warrant
certificate. Warrants will not be issued for fractional Shares.
The Trust may refuse to allow the exercise of a Warrant if the effect of
such exercise would, in the opinion of special counsel for the Trust, disqualify
the Trust as a REIT under the Code. (See "Tax Aspects of the Offering:
Qualification as a Real Estate Investment Trust" and "ERISA Consideration.")
50
<PAGE> 55
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
The following discussion summarizes certain federal income tax
considerations to the Trust and the purchasers of the Common Stock. This
discussion is based on existing federal income tax law, which is subject to
change, possibly retroactively. This discussion does not address all aspects of
federal income taxation that may be relevant to a particular investor in light
of its personal investment circumstances or to certain types of investors
subject to special treatment under the federal income tax laws (including
financial institutions, insurance companies, broker-dealers and, except to the
extent discussed below, tax-exempt entities and foreign taxpayers) and it does
not discuss any aspects of state, local or foreign tax law. This discussion
assumes that investors will hold their Common Stock as a "capital asset"
(generally, property held for investment) under the Code. Prospective investors
are advised to consult their tax advisors as to the specific tax consequences to
them of purchasing, holding and disposing of the Common Stock, including the
application and effect of federal, state, local and foreign income and other tax
laws.
TAXATION OF THE TRUST.
General The Trust plans to elect to become subject to tax as a REIT, for
federal income tax purposes, under Sections 856 through 860 of the Code and
applicable Treasury Regulations (the "REIT Requirements" or the "REIT
Provisions") commencing with the taxable year ending December 31, 1996. The
Board of Directors of the Trust currently expects that the Trust will continue
to operate in a manner that will permit the Trust to maintain its qualifications
as a REIT for each taxable year thereafter. This treatment will permit the Trust
to deduct dividend distributions to its stockholders for federal income tax
purposes, thus effectively eliminating the "double taxation" that generally
results when a corporation earns income and distributes that income to its
stockholders.
The REIT Provisions are highly technical and complex. The following
summary sets forth the material aspects of the REIT Provisions that govern the
federal income tax treatment of a REIT and its stockholders. This summary is
qualified in its entirety by the REIT Provisions, rules and regulations
promulgated thereunder, and administrative and judicial interpretations thereof.
At the closing of the offering described herein, contingent upon the
receipt of certain factual representations from the Trust, Wilson Ryan &
Campilongo will render its opinion that, commencing with the Trust's taxable
year ended December 31, 1996, the Trust was organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
has enabled and will enable it to meet the requirements for qualification and
taxation as a REIT under the Code. It must be emphasized that such opinion will
be based on various factual assumptions relating to the organization and
operation of the Trust and certain representations as to factual matters. In
addition, such opinion will be based upon the factual representations of the
Trust concerning its business and assets as set forth in the Prospectus.
Moreover, such qualification and taxation as a REIT depends upon the Trust's
ability to meet (through actual annual operating results, distribution levels
and diversity of stock ownership) the various qualification tests imposed under
the REIT Provisions discussed below, the results of which have not been and will
not be reviewed by Wilson Ryan & Campilongo. Accordingly, no assurance can be
given that the actual results of the Trust's operation for any particular
taxable year have satisfied or will satisfy such requirements. Further, the
anticipated income tax treatment described in this Prospectus may be changed,
perhaps retroactively, by legislative, administrative or judicial action at any
time. (See "Risk Factors - Tax and Regulatory Risks and Related Considerations -
Consequences of Failure to Maintain REIT Status; Trust Subject to Tax as Regular
Corporation").
As long as the Trust qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on its net income that is
currently distributed to stockholders. This treatment substantially eliminates
the "double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. Even if the Trust qualifies
for taxation as a REIT, however, it may be subject to federal income tax as
follows: First, the Trust will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Trust may be subject to the
"alternative minimum tax" on its items of tax preference, if any. Third, if the
Trust has (i) net income from the sale or other disposition of "foreclosure
property" (generally, property acquired at or in lieu of foreclosure of the
mortgage secured by such property or as a result of a default under a lease of
such property) which is held primarily for sale to customers in the ordinary
course of business, or (ii) other nonqualifying income from
51
<PAGE> 56
foreclosure property, it will be subject to tax at the highest corporate rate on
such income. Fourth, if the Trust has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business other than
foreclosure property), such income will be subject to a 100% tax. Fifth, if the
Trust should fail to satisfy the 75% gross income test or the 95% gross income
test (as discussed below), but has nonetheless maintained its qualification as a
REIT because certain other requirements have been met, it will be subject to a
100% tax on an amount equal to (a) the gross income attributable to the greater
of the amount by which the Trust fails the 75% or 95% test multiplied by (b) a
fraction intended to reflect the Trust's profitability. Sixth, if the Trust
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
periods, the Trust would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, pursuant
to IRS Notice 88-19, if the Trust has a net unrealized built-in gain, with
respect to any asset (a "Built-In Gain Asset") acquired by the Trust from a
corporation which is or has been a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in a transaction in which the basis of the
Built-In Gain Asset in the hands of the Trust is determined by reference to the
basis of the asset in the hands of the C corporation, and the Trust will
recognize gain on the disposition of such asset during the ten-year period (the
"Recognition Period") beginning on the date on which such asset was acquired by
the Trust, then, to the extent of the Built-In Gain (i.e., the excess of (a) the
fair market value of such asset over (b) the Trust's adjusted basis in such
asset, determined as of the beginning of the Recognition Period), such gain will
be subject to tax at the highest regular corporate rate pursuant to Treasury
Regulations that have not yet been promulgated. The results described above with
respect to the recognition of Built-In Gain assume that the Trust will make an
election pursuant to Notice 88-19 and that such treatment is not modified by
certain revenue proposals in the Administration's 1997 Budget Proposal.
Requirements for Qualification To qualify as a REIT, the Trust must elect
to be so treated and must meet on a continuing basis certain requirements (as
discussed below) relating to the Trust's organization, sources of income, nature
of assets, and distribution of income to shareholders. The Code defines a REIT
as a corporation, trust or association (i) which is managed by one or more
trustees or directors; (ii) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest;
(iii) which would be taxable as a domestic corporation, but for the REIT
Provisions; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial ownership
of which is held by 100 or more persons; (vi) during the last half of each
taxable year not more than 50% in value of the outstanding stock of which is
owned, actually or constructively, by or for five or fewer individuals (as
defined in the Code to include certain entities); and (vii) which meets certain
other tests, described below, regarding the nature of its income and assets. The
REIT Provisions provide that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of twelve months, or during a proportionate
part of a taxable year of less than twelve months. Conditions (v) and (vi) will
not apply until after the first taxable year for which an election is made by
the Trust to be taxed as a REIT.
The Trust believes that it has previously issued sufficient Preferred
Shares and that during the course of this Offering it will issue sufficient
shares of Common Stock with sufficient diversity of ownership to allow the Trust
to satisfy conditions (v) and (vi). In addition, the Trust's constituent
documents provide for restrictions regarding the transfer and ownership of
shares, which restrictions are intended to assist the Trust in continuing to
satisfy the share ownership requirements described in (v) and (vi) above. Such
ownership and transfer restrictions are described in "Summary of Organizational
Documents and Securities." These restrictions may not ensure that the Trust
will, in all cases, be able to satisfy the share ownership requirements
described above. If the Trust fails to satisfy such share ownership
requirements, the Trust's status as a REIT will terminate. See "Failure to
Qualify."
In addition, in order to be taxed as a REIT, the Trust must maintain
certain records and request certain information from its stockholders designed
to disclose the actual ownership of its stock. The Trust has represented that it
will comply with these requirements. A corporation may also not elect to become
a REIT unless its taxable year is the calendar year.
the Trust has a calendar taxable year.
Income Tests In order to maintain its qualification as a REIT, the Trust
annually must satisfy three gross income requirements. First, at least 75% of
the Trust's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from: (i) rents
from real property; (ii) interest on obligations secured by mortgages on real
property or on interests in real property; (iii) gain from the sale or other
disposition of real property
52
<PAGE> 57
(including interests in real property and interests in mortgages on real
property) not held primarily for sale to customers in the ordinary course of
business; (iv) dividends or other distributions on, and gain (other than gain
from prohibited transactions) from the sale or other disposition of,
transferable shares in other real estate investment trusts; (v) abatements and
refunds of taxes on real property; (vi) income and gain derived from foreclosure
property; (vii) amounts (other than amounts the determination of which depend in
whole or in part on the income or profits of any person) received or accrued as
consideration for entering into agreements (a) to make loans secured by
mortgages on real property or on interests in real property or (b) to purchase
or lease real property (including interests in real property and interests in
mortgages on real property); (viii) gain from the sale or other disposition of a
real estate asset which is not a prohibited transaction; and (ix) qualified
temporary investment income. Second, at least 95% of the Trust's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from the sources described above with respect to the 75% gross income
test, dividends, interest, and gain from the sale or disposition of stock or
securities (or from any combination of the foregoing). Third, short-term gain
from the sale or other disposition of stock or securities, gain from prohibited
transactions, and gain on the sale or other disposition of real property held
for less than four years (apart from involuntary conversions and sales or other
disposition of foreclosure property) must represent less than 30% of the Trust's
gross income (including gross income from prohibited transactions) for each
taxable year.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
Generally, if a loan is secured by both personal property and real
property, interest must be allocated between the personal property and the real
property, with only the interest allocable to the real property qualifying as
mortgage interest under the 75% gross income test. Treasury Regulations provide
that if a loan is secured by both personal and real property and the fair market
value of the real property as of the commitment date equals or exceeds the
amount of the loan, the entire interest amount will qualify under the 75% gross
income test. If the amount of the loan exceeds the fair market value of the real
property, the interest income allocated to the real property is an amount equal
to the interest income multiplied by a fraction, the numerator of which is the
fair market value of the real property as of the commitment date, and the
denominator of which is the amount of the loan. The interest income allocated to
the personal property is an amount equal to the excess of the total interest
income over the interest income allocated to the real property.
Interest earned on mortgage loans, and mortgage-backed securities secured
by or representing an interest in such loans will qualify as "interest" for
purposes of the 95% and 75% gross income tests if such assets are treated as
obligations secured by mortgages on real property or on interests in real
property. However, income attributable to securities (other than Qualified REIT
Assets) that the Trust holds directly or indirectly, dividends on stock
(including any dividends the Trust receives from any subsidiary), interest on
any other obligations not secured by real property, and gains from the sale or
disposition of stock or other securities that are not Qualified REIT Assets will
not qualify under the 75% gross income test if such income is not treated as
interest on obligations secured by mortgages on real property or on interests in
real property or gain from the sale or other disposition of a Qualified REIT
Asset, which is not a prohibited transaction. Such income will qualify under the
95% gross income test, however, if such income constitutes interest, dividends
or gain from the sale or disposition of stock or securities. Income from loan
guarantee fees, mortgage servicing contracts or other contracts under which the
Trust would earn fees for performing services will not qualify under either the
95% or 75% gross income tests if such income constitutes fees for services
rendered by the Trust or is not treated as interest (on obligations secured by
mortgages on real property or on interests in real property for purposes of the
75% gross income test). Similarly, income from hedging, including the sale of
hedges, will not qualify under the 75% or 95% gross income tests unless such
hedges constitute Qualified Hedges, in which case such income will qualify under
the 95% gross income test.
In order to comply with the 95% and 75% gross income tests, the Trust has
limited and will continue to limit substantially all of the assets that it
acquires to Qualified REIT Assets. As a result, the Trust may limit the type of
assets, including hedging contracts, that it otherwise might acquire and,
therefore, the type of income it otherwise might receive, including income from
hedging, other than income from Qualified Hedges. See "Business--Hedging."
In addition, to comply with the 30% gross income test, the Trust may have
to hold mortgage loans and mortgage-backed securities for four or more years and
securities (other than securities that are Qualified REIT Assets) and
53
<PAGE> 58
hedges for one year or more at times when the Trust might otherwise have opted
for the disposition of such assets for short term gains.
In order to comply with the REIT gross income tests, the Trust has
monitored and will continue to monitor its income, including income from
dividends, hedging transactions, futures contracts, servicing and sales of
Mortgage Assets, gains on the sale of securities, and other income not derived
from Qualified REIT Assets. The Trust believes that the aggregate amount of any
nonqualifying income in any taxable year has not exceeded and will not exceed
the limit on nonqualifying income under the gross income tests.
If the Trust fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Trust's failure to meet such tests
was due to reasonable cause and not due to willful neglect, the Trust attaches a
schedule of the sources of its income to its federal income tax return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Trust would be entitled to the benefit of these relief provisions. For example,
if the Trust fails to satisfy the gross income tests because nonqualifying
income that the Trust intentionally incurs exceeds the limits on such income,
the Internal Revenue Service (the "Service") could conclude that the Trust's
failure to satisfy the tests was not due to reasonable cause. If these relief
provisions are inapplicable to a particular set of circumstances involving the
Trust, the Trust will not qualify as a REIT. As discussed above in "Federal
Income Tax Considerations--Taxation of the Trust--General," even if these relief
provisions apply, a tax would be imposed with respect to the excess net income.
There can be no assurance that the Trust will always be able to maintain
compliance with the gross income tests for REIT qualification despite its
periodic monitoring procedures. No similar mitigation provision provides relief
if the Trust fails the 30% gross income test. In such case, the Trust would
cease to qualify as a REIT. (See "--Failure to Qualify.")
Any gain realized by the Trust on the sale of any property (including
mortgage loans and mortgage-backed securities) held as inventory or other
property held primarily for sale to customers in the ordinary course of business
will be treated as income from a prohibited transaction that is subject to a
100% penalty tax. Such prohibited transaction income may also have an adverse
effect upon the Trust's ability to satisfy the income tests for qualification as
a REIT. Under existing law, whether property is held as inventory or primarily
for sale to customers in the ordinary course of a trade or business is a
question of fact that depends on all the facts and circumstances with respect to
the particular transaction. (See "Business--Mortgage Conduit Business.") If the
Trust were to sell directly such mortgage securities on a regular basis, there
is a substantial risk that such sales would constitute prohibited transactions
and that all of the profits therefrom would be subject to a 100% tax. Therefore,
such sales are contemplated to be made only through a non-qualified REIT
subsidiary which itself will not be subject to the 100% penalty tax on income
from prohibited transactions, which is only applicable to a REIT.
Asset Tests The Trust, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Trust's total assets must be represented by
Qualified REIT Assets, cash, cash items and government securities. Qualified
REIT Assets include (i) interests in real property and interests in mortgages on
real property, (ii) interests in REMICs, and (iii) stock or debt instruments
held for not more than one year purchased with the proceeds of a stock offering
or long-term (at least five years) public debt offering of the Trust. Second,
not more than 25% of the Trust's total assets may be represented by securities
other than those in the 75% asset class. Third, of the investments included in
the 25% asset class, the value of any one issuer's securities owned by the Trust
may not exceed 5% of the value of the Trust's total assets and the Trust may not
own more than 10% of any one issuer's outstanding voting securities. The Trust
believes that substantially all of its assets, are Qualified REIT Assets.
As described above, the Trust may engage in its Mortgage Conduit Business
through a non-qualified REIT subsidiary. It is presently anticipated that under
this arrangement, the Trust would own 100% of the nonvoting preferred stock of
the non-qualified REIT subsidiary. The Trust does not plan to own any of the
voting Common Shares of such non-qualified REIT subsidiary, and therefore the
Trust will not be considered to own more than 10% of its voting securities. In
addition, the Trust anticipates that the aggregate value of its securities of
such subsidiary would not at any time exceed, 5% of the total value of the
Trust's assets. However, there can be no assurance that the Service will not
contend that the value of the Trust's interest in such subsidiary exceeds the 5%
value limitation.
54
<PAGE> 59
When purchasing mortgage-related securities, the Trust and its counsel
may rely on opinions of counsel for the issuer or sponsor of such securities
given in connection with the offering of such securities, or statements made in
related offering documents, for purposes of determining whether and to what
extent those securities (and the income therefrom) constitute Qualified REIT
Assets (and income) for purposes of the REIT asset tests (and the REIT gross
income tests discussed above).
A regular or residual interest in a REMIC will be treated as a Qualified
REIT Asset for purposes of the REIT asset tests and income derived with respect
to such interests will be treated as interest on obligations secured by
mortgages on real property, assuming that at least 95% of the assets of the
REMIC are Qualified REIT Assets. If less than 95% of the assets of the REMIC are
Qualified REIT Assets, only a proportionate share of the assets of and income
derived from the REMIC will be treated as qualifying under the REIT asset and
income tests. the Trust believes that its REMIC interests fully qualify for
purposes of the REIT income and asset tests.
If the Trust invests in a partnership, it will be deemed to own its
proportionate share of the assets of the partnership and will be deemed to be
entitled to the income of the partnership attributable to such share. In
addition, the character of the assets and gross income of the partnership shall
retain the same character in the hands of the Trust for purposes of the REIT
gross income tests and the asset tests.
After initially meeting the asset tests at the close of any quarter, the
Trust will not lose its status as a REIT for failure to satisfy the asset tests
at the end of a later quarter solely by reason of changes in asset values. If
the failure to satisfy the asset tests results from an acquisition of securities
or other property during a quarter, the failure can be cured by disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
the Trust intends to maintain adequate records of the value of its assets to
ensure compliance with the asset tests and to take such other actions within 30
days after the close of any quarter as may be required to cure any
noncompliance. If the Trust fails to cure noncompliance with the asset tests
within such time period, the Trust would cease to qualify as a REIT.
Annual Distribution Requirements The Trust, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (i) the sum of (a) 95% of the
Trust's "REIT taxable income" (computed without regard to the dividends paid
deduction and by excluding the Trust's net capital gain) and (b) 95% of the net
income (after tax), if any, from foreclosure property, minus (ii) the sum of
certain items of noncash income. In addition, if the Trust disposes of any
Built-In Gain Asset during its Recognition Period, the Trust will be required,
pursuant to Treasury Regulations which have not yet been promulgated, to
distribute at least 95% of the Built-in Gain (after tax), if any, recognized on
the disposition of such asset. Such distributions must be paid in the taxable
year to which they relate, or in the following taxable year if declared before
the Trust timely files its tax return for such year and if paid on or before the
first regular dividend payment date after such declaration and if the Trust so
elects and specifies the dollar amount on its tax return. To the extent that the
Trust does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gain corporate tax rates.
Furthermore, if the Trust should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior periods, the Trust would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed. The Trust intends to make timely distributions sufficient to
satisfy these annual distribution requirements.
The Trust anticipates that it will generally have sufficient cash or
liquid assets to enable it to satisfy the distribution requirements described
above. It is possible, however, that the Trust, from time to time, may not have
sufficient cash or other liquid assets to meet these distribution requirements
due to timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Trust. For
instance, the Trust may realize income without a corresponding cash payment, as
in the case of original issue discount or accrued interest on defaulted Mortgage
Loans. In the event that such timing differences occur, in order to meet the
distribution requirements, the Trust may find it necessary to sell assets,
arrange for short-term, or possibly long-term, borrowings, or pay dividends in
the form of taxable stock dividends.
The Service has ruled that if a REIT's dividend reinvestment plan allows
stockholders of the REIT to elect to have cash distributions reinvested in
shares of the REIT at a purchase price equal to at least 95% of fair market
value on the
55
<PAGE> 60
distribution date, then such cash distributions reinvested pursuant to such a
plan qualify under the 95% distribution test. The terms of the Trust's DRP will
comply with this ruling. See "Dividend Reinvestment Plan."
Under certain circumstances, the Trust may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Trust's deduction
for dividends paid for the earlier year. Thus, the Trust may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Trust
will be required to pay interest based upon the amount of any deduction taken
for deficiency dividends.
RECORD KEEPING REQUIREMENTS.
A REIT is required to maintain certain records, including records
regarding the actual and constructive ownership of its shares, and within 30
days after the end of its taxable year, to demand statements from persons owning
above a specified level of the REIT's shares (e.g., if the Trust has over 200
but fewer than 2,000 stockholders of record, from persons holding 1% or more of
the Trust's outstanding shares of common stock and if the Trust has 200 or fewer
shareholders of record, from persons holding 1/2% or more of the Common Stock)
regarding their ownership of shares. In addition, the Trust must maintain, as
part of its records, a list of those persons failing or refusing to comply with
this demand. Shareholders who fail or refuse to comply with the demand must
submit a statement with their tax returns setting forth the actual stock
ownership and other information.
FAILURE TO QUALIFY.
If the Trust fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Trust will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Trust fails to qualify will not be deductible by the Trust nor will they be
required to be made. As a result, the Trust's failure to qualify as a REIT would
substantially reduce the cash available for distribution by the Trust to its
stockholders. In addition, if the Trust fails to qualify as a REIT, all
distributions to stockholders will be taxable as ordinary income, to the extent
of the Trust's current and accumulated earnings and profits, and, subject to
certain limitations of the Code, corporate distributes may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Trust will also be disqualified from taxation as a REIT for the
four taxable years following the year during which qualification was lost. It is
not possible to state whether in all circumstances the Trust would be entitled
to such statutory relief. Failure to qualify for even one year could result in
the Trust's incurring substantial indebtedness (to the extent borrowings are
feasible) or liquidating substantial investments in order to pay the resulting
taxes.
TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY.
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, or (iii) is an estate or trust the income
of which is subject to United States federal income taxation regardless of its
source.
As long as the Trust qualifies as a REIT, distributions made by the Trust
out of its current or accumulated earnings and profits (and not designated as
capital gain dividends) will constitute dividends taxable to its taxable U.S.
Stockholders as ordinary income. Such distributions will not be eligible for the
dividends received deduction in the case of U.S. Stockholders that are
corporations. Distributions made by the Trust that are properly designated by
the Trust as capital gain dividends will be taxable to taxable U.S. Stockholders
as long-term capital gains (to the extent that they do not exceed the Trust's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Stockholder has held his shares of Common Stock. U.S. Stockholders
that are corporations may, however, be required to treat up to 20% of certain
capital gain dividends as ordinary income. To the extent that the Trust makes
distributions (not designated as capital gain dividends) in excess of its
current and accumulated earnings and profits, such distributions will be treated
first as a tax-free return of capital to each U.S. Stockholder, reducing the
adjusted basis which such U.S. Stockholder has in his shares of Common Stock for
tax purposes by the amount of such distribution (but not below zero), with
distributions in excess of a U.S. Stockholder's adjusted basis in his shares
taxable as capital gains (provided that the shares have been held as a capital
asset). the Trust will notify stockholders at the end of each year as to the
portions of the distributions which constitute ordinary income, net capital gain
or return of capital. Dividends declared by the Trust in October, November, or
December
56
<PAGE> 61
of any year and payable to a stockholder of record on a specified date in any
such month shall be treated as both paid by the Trust and received by the
stockholder on December 31 of such year, provided that the dividend is actually
paid by the Trust on or before January 31 of the following calendar year.
Stockholders may not include in their own income tax returns any net operating
losses or capital losses of the Trust.
Dividends paid with respect to Common Stock that a DRP participant
reinvests in Common Stock through purchases by the Agent in the open market will
be treated for federal income tax purposes as having been received by the
participant in the form of a taxable cash distribution. The amount of the cash
distribution will be treated as a dividend to the extent the Trust has current
or accumulated earnings and profits for federal income tax purposes.
Alternatively, dividends paid with respect to Common Stock that a participant
reinvests in Common Stock that are registered and newly issued by the Trust will
be treated for federal income tax purposes as having been received by the
participant in the form of a taxable stock distribution. In that case, the DRP
participant will be treated as having received a dividend, taxable as ordinary
income to the extent the Trust has current or accumulated earnings and profits,
in an amount equal to the fair market value of the Common Stock purchased with
the reinvested dividends, generally on the date that the Agent credits such
Common Stock to the DRP participant's account, plus brokerage commissions and
fees, if any, subtracted from the participant's distribution.
Distributions made by the Trust and gain arising from the sale or
exchange by a U.S. Stockholder of shares of Common Stock will not be treated as
passive activity income, and, as a result, U.S. Stockholders generally will not
be able to apply any "passive losses" against such income or gain. Distributions
made by the Trust (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment income limitation. Gain arising from the sale or other disposition of
Common Stock, however, will not be treated as investment income unless the U.S.
Stockholder elects to reduce the amount of such U.S. Stockholder's total net
capital gain eligible for the 28% maximum capital gains rate by the amount of
such gain with respect to such Common Stock.
Upon any sale or other disposition of Common Stock, a U.S. Stockholder
will recognize gain or loss for federal income tax purposes in an amount equal
to the difference between (i) the amount of cash and the fair market value of
any property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares of Common Stock for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset, and will be long-term gain or loss if such
shares have been held for more than one year. In general, any loss recognized by
a U.S. Stockholder upon the sale or other disposition of shares of Common Stock
that have been held for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss, to the extent of
distributions received by such U.S. Stockholder from the Trust which were
required to be treated as long-term capital gains.
The Trust does not expect to acquire or retain residual interests issued
by REMICs. Such residual interests, if acquired by a REIT, could generate excess
inclusion income taxable to the REIT's stockholders in proportion to the
dividends received from the REIT. Excess inclusion income cannot be offset by
net operating losses of a stockholder. If the stockholder of a REIT holding a
residual interest in a REMIC is a tax-exempt entity, the excess inclusion income
is fully taxable to such stockholder as unrelated business taxable income. If
allocated to a Non-U.S. Stockholder (as defined below), the excess inclusion
income is subject to federal income tax withholding without reduction pursuant
to any otherwise applicable tax treaty. Potential investors, and in particular,
tax-exempt entities, are urged to consult with their tax advisors concerning
this issue.
INFORMATION REPORTING AND BACKUP WITHHOLDING.
Under temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax will generally not
apply to dividends paid on the Common Stock to a Non-United States Holder at an
address outside the United States. Payments by a United States office of a
broker of the proceeds of a sale of the Common Stock is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies its Non-United States Holder status under penalties of perjury or
otherwise establishes an exemption. Information reporting requirements (but not
backup withholding) will also apply to payments of the proceeds of sales of such
shares by foreign offices of United States brokers, or foreign brokers with
certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a Non-United States
Holder and certain other conditions are met, or the holder otherwise establishes
an exemption.
57
<PAGE> 62
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules will be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
These information reporting and backup withholding rules are under review
by the United States Treasury and their application to the Common Stock could be
changed by future regulations.
TAXATION OF TAX-EXEMPT STOCKHOLDERS.
Subject to the discussion below regarding a "pension-held REIT," a
tax-exempt stockholder is generally not subject to tax on distributions from the
Trust or gain realized on the sale of the Common Stock, provided that such
stockholder has not incurred indebtedness to purchase or hold its Common Stock,
that its shares are not otherwise used in an unrelated trade or business of such
stockholder, and that the Trust consistent with its present intent, does not
hold a residual interest in a REMIC that gives rise to "excess inclusion" income
as defined under section 860E of the Code. If the Trust were to be treated as a
"taxable mortgage pool," however, a substantial portion of the dividends paid to
a tax-exempt stockholder may be subject to tax as UBTI. Although the Trust does
not believe that the Trust, or any portion of its assets, will be treated as a
taxable mortgage pool, no assurance can be given that the IRS might not
successfully maintain that such a taxable mortgage pool exists.
If a qualified pension trust (i.e., any pension or other retirement trust
that qualifies under section 401(a) of the Code) holds more than 10% by value of
the interests in a "pension-held REIT" at any time during a taxable year, a
substantial portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is any REIT
(i) that would not have qualified as a REIT but for the provisions of the Code
which look through qualified pension trust stockholders in determining ownership
of stock of the REIT and (ii) in which at least one qualified pension trust
holds more than 25% by value of the interests of such REIT or one or more
qualified pension trusts (each owning more than a 10% interest by value in the
REIT) hold in the aggregate more than 50% by value of the interests in such
REIT. Assuming compliance with the Ownership Limit provisions described in
"Summary of Organizational Documents and Securities," it is unlikely that
pension plans will accumulate sufficient stock to cause the Trust to be treated
as a pension-held REIT.
Distributions to certain types of tax-exempt stockholders exempt from
federal income taxation under sections 501(c)(7), (c)(9), (c)(17), and (c)(20)
of the Code may also constitute UBTI, and such prospective investors should
consult their tax advisors concerning the applicable "set aside" and reserve
requirements.
TAXATION OF NON-U.S. STOCKHOLDERS.
The following discussion summarizes certain United States federal tax
consequences of the acquisition, ownership and disposition of Common Stock by an
initial purchaser that, for United States federal income tax purposes, is not a
"United States person" (a "Non-United States Holder"). For purposes of this
discussion, a "United States person" means: a citizen or resident of the United
States; a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof; or an estate or trust whose income is includible in gross
income for United States federal income tax purposes regardless of its source.
This discussion does not consider any specific facts or circumstances that may
apply to a particular Non-United States Holder. Prospective investors are urged
to consult their tax advisors regarding the United States federal tax
consequences of acquiring, holding and disposing of Common Stock as well as any
tax consequences that may arise under the laws of any foreign, state, local or
other taxing jurisdiction.
Dividends paid by the Trust out of earnings and profits, as determined
for United States federal income tax purposes, to a Non-United States Holder
will generally be subject to withholding of United States federal income tax at
the rate of 30%, unless reduced or eliminated by an applicable tax treaty or
unless such dividends are treated as effectively connected with a United States
trade or business. Distributions paid by the Trust in excess of its earnings and
profits will be treated as a tax-free return of capital to the extent of the
holder's adjusted basis in his shares, and thereafter as gain from the sale or
exchange of a capital asset as described below. If it cannot be determined at
the time a distribution is made whether such distribution will exceed the
earnings and profits of the Company, the distribution will be subject to
withholding at the same rate as dividends. Amounts so withheld, however, will be
refundable or creditable against the Non-United States Holder's
58
<PAGE> 63
United States federal tax liability if it is subsequently determined that such
distribution was, in fact, in excess of the earnings and profits of the Trust.
If the receipt of the dividend is treated as being effectively connected with
the conduct of a trade or business within the United States by a Non-United
States Holder, the dividend received by such holder will be subject to the
United States federal income tax on net income that applies to United States
persons generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax).
For any year in which the Trust qualifies as a REIT, distributions to a
Non-United States Holder that are attributable to gain from the sales or
exchanges by the Trust of "United States real property interests" will be
treated as if such gain were effectively connected with a United States business
and will thus be subject to tax at the normal capital gain rates applicable to
United States stockholders (subject to applicable alternative minimum tax) under
the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Also, distributions subject to FIRPTA may be subject to a 30% branch
profits tax in the hands of a foreign corporate stockholder not entitled to a
treaty exemption. The Trust is required to withhold 35% of any distribution that
could be designated by the Company as a capital gains dividend. This amount may
be credited against the Non-United States Holder's FIRPTA tax liability. It
should be noted that Mortgage Loans without substantial equity or shared
appreciation features generally would not be classified as "United States real
property interests."
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale or other disposition of its
shares of Common Stock unless (i) the gain is effectively connected with the
conduct of a trade or business within the United States by the Non-United States
Holder, (ii) in the case of a Non-United States Holder who is a nonresident
alien individual and holds such shares as a capital asset, such holder is
present in the United States for 183 or more days in the taxable year and
certain other requirements are met, or (iii) the Non-United States Holder is
subject to tax under the FIRPTA rules discussed below. Gain that is effectively
connected with the conduct of a United States Holder will be subject to the
United States federal income tax on net income that applies to United States
persons generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax) but will not be subject to withholding.
Non-United States Holders should consult applicable treaties, which may provide
for different rules.
Gain recognized by a Non-United States Holder upon a sale of Common Stock
will generally not be subject to tax under FIRPTA if the Trust is a
"domestically controlled REIT," which is defined generally as a REIT in which at
all times during a specified testing period less than 50% in value of its shares
were held directly or indirectly by non-U.S. persons. Because only a minority of
the Trust's stockholders are expected to be Non-United States Holders, the
Company anticipates that it will qualify as a "domestically controlled REIT."
Accordingly, a Non-United States Holder should not be subject to U.S. tax from
gains recognized upon disposition of its shares.
OTHER TAX CONSEQUENCES.
The Trust and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Trust and
its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Trust.
59
<PAGE> 64
- --------------------------------------------------------------------------------
ERISA CONSIDERATIONS
- --------------------------------------------------------------------------------
This section is a summary of certain matters arising under the Employee
Retirement Income Security Act of 1974, as amended, together with applicable
regulations ("ERISA"), and Section 4975 of the Code which a fiduciary of an
"employee benefit plan" as defined in and subject to ERISA or of a "plan" as
defined in Section 4975 of the Code who has investment discretion should
consider before deciding to purchase Common Shares (such "employee benefit
plans" and "plans" being referred to herein as "Plans" and such fiduciaries with
investment discretion being referred to herein as "Plan Fiduciaries"). This
section is not intended to deal with all matters arising under ERISA or Section
4975 of the Code that may be relevant to a prospective purchaser and does not
include state law or other legal requirements applicable to governmental or
church plans. The following statements regarding certain matters arising under
ERISA and the Code are based on the provisions of ERISA and the Code as
currently in effect and the existing administrative and judicial interpretations
thereunder. No assurance can be given that administrative, judicial or
legislative changes will not occur that could make such statements incorrect or
incomplete.
In general, the terms "employee benefit plan" as defined in ERISA and
"plan" as defined in Section 4975 of the Code together refer to any plan or
account of various types that provide retirement or welfare benefits to an
individual or to an employer's employees and their beneficiaries. Such plans
include, but are not limited to, corporate pension and profit sharing plans,
so-called KEOGH plans for self-employed individuals (including partners),
simplified employee pension plans and individual retirement accounts described
in Section 408 of the Code, medical benefit plans, bank commingled trust funds
and insurance company separate accounts for such plans and accounts and, under
certain circumstances, the general account of an insurance company.
FIDUCIARY AND PROHIBITED TRANSACTION CONSIDERATIONS.
Each Plan Fiduciary, before deciding to purchase Common Shares, must be
satisfied that such an investment is a prudent investment for the Plan, that the
investments of the Plan, including an investment in Common Shares, are
diversified so as to minimize the risks of large losses, that an investment in
Common Shares complies with the documents of the Plan and related trust, and
that an investment in Common Shares complies with any other applicable
requirements of ERISA or the Code. Plan Fiduciaries should also consider the
entire discussion concerning federal income taxes under "Federal Income Tax
Considerations and the discussion concerning shareholders' liability for
obligations of the Trust under "Risk Factors--Possible Liability of Trust
Shareholders" which are relevant to any decision by a Plan Fiduciary to purchase
Common Shares .
Each Plan Fiduciary, before deciding to purchase Common Shares, must also
give appropriate consideration as to whether a prohibited transaction described
in Section 406 of ERISA or Section 4975 of the Code would result from the Plan's
purchase of Common Shares and, if so, the availability of an exemption. Those
prohibited transactions include various direct and indirect transactions, such
as sales and loans, between a Plan and any person who with respect to the Plan
is a "party in interest" as defined in Section 3(14) of ERISA or "disqualified
person" as defined in Section 4975 of the Code, the use of the Plan's assets for
the benefit of any such person, and any fiduciary of the Plan dealing with the
Plan's assets in the fiduciary's own interest. The consequences of any such
prohibited transaction, if no exemption applies, can include the imposition of
excise taxes on the party in interest or disqualified person, the persons
involved in the transaction having to rescind the transaction and pay any amount
to the Plan for any losses realized by the Plan or profits realized by such
persons, disqualification of any individual retirement account involved in the
transaction with adverse tax consequences to the owner of such account, and
other liabilities that can have a significant, adverse effect on such persons.
PLAN ASSET ISSUE.
The following paragraphs describe the rules applicable in determining
whether the assets of the Trust will for purposes of ERISA and Section 4975 of
the Code be considered assets of the Plans which purchase Common Shares or for
whose benefit Common Shares are purchased (i.e., whether Trust assets will be
considered Plan assets). If assets of the Trust will be considered Plan assets,
(i) a Plan Fiduciary must consider whether a purchase of Common Shares will
result in a violation of any of the fiduciary rules under ERISA and (ii) any
prospective purchaser of Common Shares must consider that prohibited
transactions within the meaning of Section 406 of ERISA or Section 4975 of the
Code will occur if assets of the
60
<PAGE> 65
Trust are involved in transactions that include persons who are "parties in
interest" as defined in Section 3(14) of ERISA or "disqualified persons" as
defined in Section 4975 of the Code with respect to such Plans or if a person
who manages or controls assets of the Trust deals with those assets in that
person's own interest. The possible consequences of any such prohibited
transaction, if an exemption does not apply, are described above in the second
paragraph under the heading "Fiduciary and Prohibited Transaction
Considerations" and can have a significant adverse effect on the Partnerships,
the Trust and the Corporation.
A regulation issued by the United States Department of Labor under ERISA
(the "Plan Asset Regulation") contains rules for determining when an investment
by a Plan or for the benefit of a Plan in an equity interest in an entity, such
as the Common Shares, will result in the underlying assets of the entity being
deemed assets of the Plan for purposes of ERISA and Section 4975 of the Code.
Those rules provide that assets of the entity will not be assets of a Plan that
purchases an equity interest therein if the equity interest qualifies as a
"publicly-offered security" or any of certain other exceptions apply.
Under the Plan Asset Regulation, a "publicly-offered security" is a
security that is (i) "freely transferable," (ii) part of a class of securities
that is "widely-held," and (iii) either (a) a part of a class of securities that
is registered under Section 12(b) or 12(g) of the Exchange Act or (b) sold to a
Plan as part of an offering of securities to the public pursuant to an effective
registration statement under the Securities Act and the class of securities of
which such security is a part is registered under the Exchange Act within 120
days (or such later time as may be allowed by the Securities and Exchange
Commission) after the end of the fiscal year of the issuer during which the
offering of such securities to the public occurred. Whether a security is
considered "freely transferable" depends on the facts and circumstances of each
case. If the security is part of an offering of which the minimum investment is
$10,000 or less, any restriction on or prohibition against any transfer or
assignment of such security for the purposes of preventing a termination or
reclassification of the entity for federal or state tax purposes will not of
itself ordinarily prevent the security from being considered freely
transferable. A class of securities is considered "widely-held" only if it is a
class of securities that is owned by 100 or more investors independent of the
issuer and of one another. A class of securities will not fail to be widely-held
solely because after the initial offering the number of independent investors
falls below 100 as a result of events beyond the control of the issuer.
The Trust believes that the Common Shares to be sold pursuant to the
Offering meet the criteria to be "publicly-offered securities" so that assets of
the Trust should not be deemed assets of the Plans purchasing Common Shares.
First, the Trust believes that the Common Shares will be considered to be freely
transferable, as the minimum investment is less than $10,000 and the only
restriction on their transfer is the Ownership Limitation. Second, the Trust
expects the Common Shares to immediately after the Offering be held by
substantially more than 100 investors and at least 100 or more of such investors
to be independent of the Trust and of one another. Third, the Common Shares are
(i) part of a class of securities that is registered under Section 12(b) or
12(g) of the Exchange Act and (ii) are being sold pursuant to the Offering as
part of an offering of securities to the public pursuant to an effective
registration statement under the Securities Act and the class of securities of
which the Common Shares are a part is registered under the Exchange Act within
120 days after the end of the year of the Trust during which the offering of
such securities to the public occurs.
THE TRUST DOES NOT REPRESENT THAT A PURCHASE OF COMMON SHARES MEETS THE
RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO OR IS APPROPRIATE FOR ANY PARTICULAR
"EMPLOYEE BENEFIT PLAN" AS DEFINED IN ERISA OR ANY "PLAN" AS DEFINED IN SECTION
4975 OF THE CODE. THE FIDUCIARY WITH INVESTMENT DISCRETION CONCERNING ANY
EMPLOYEE BENEFIT PLAN OR PLAN SHOULD CONSULT WITH ITS OWN LEGAL ADVISOR AND
OTHER APPROPRIATE ADVISORS REGARDING SPECIFIC CONSIDERATIONS ARISING UNDER
ERISA, SECTION 4975 OF THE CODE AND STATE AND OTHER LAW WITH RESPECT TO THE
PURCHASE, OWNERSHIP OR SALE OF COMMON SHARES BY SUCH EMPLOYEE BENEFIT PLAN OR
PLAN IN LIGHT OF THE CIRCUMSTANCES OF THAT PARTICULAR EMPLOYEE BENEFIT PLAN OR
PLAN.
61
<PAGE> 66
- --------------------------------------------------------------------------------
PLAN OF DISTRIBUTION
- --------------------------------------------------------------------------------
The Trust is offering 1,500,000 of it Common Shares at $10 per Share
($15,000,000), together with Warrants for the purchase of up to 150,000
additional Common Shares. The Minimum Investment is 100 Shares. There is no firm
commitment to purchase or sell any Common Shares or Warrants. Common Shares will
be offered by selling agents who are selected by Brookstreet Securities
Corporation, the Managing Dealer, and the Trust and are either members of the
National Association of Securities Dealers, Inc. ("NASD"). Commissions may be
paid to selling agents on bona fide sales prior to the satisfaction of all
escrow conditions specified in the Prospectus. The Trust will pay retail
commissions of up to 6% on the sale of Shares during the initial offering period
(excluding shares sold to the DRP).
One Shareholder Warrant to purchase one Common Share at $7.00 per share
will be issued for each ten Common Shares purchased and may be exercised during
the twenty-fifth through the forty-eighth month following the date of this
Offering. On the exercise of Warrants, the Trust will pay a retail commission of
$0.25 per Share but only if: (i) the selling agent who solicits such exercise is
in compliance with SEC Rule 10b-6; (ii) the Warrant is not exercised from a
discretionary account without the solicitation and approval of the account
holder; (iii) the market price per Share at the time of Warrant exercise is
greater than the Warrant exercise price; and (iv) disclosure of the fee is made
to the holder at the time of exercise. Warrants will be exercisable for a period
which will be no later than thirty-six months from the effective date of this
Prospectus. Retail commissions will be paid to selling agents by Brookstreet at
regular intervals during the offering period.
The Trust has contracted with Brookstreet to provide marketing services
as the Managing Broker-Dealer with respect to this offering. Brookstreet's
marketing services will consist of services related to the selection and
management of selling agents for this offering's selling group and the printing
of offering materials for this offering, and of related advertising and selling
agent materials. The total payments to Brookstreet and the other selling agents
in connection with the offering, including retail and wholesale commissions and
expense reimbursements, will not exceed 10% of the Gross Proceeds.
The Trust has granted Managing Dealer Warrants to purchase 150,000 Common
Shares at $9.00 per Share to Brookstreet and its assignees, exercisable during
the twenty-fifth through the forty-eighth month following the date of this
offering. If 1,500,000 Shares and 150,000 Managing Dealer's Warrants are issued
and all Managing Dealer's Warrants are exercised at $9.00 per Share, the
"Proceeds to the Trust" will be increased to $16,462,500.
Prior to this offering, there has been no public market for the Common
Shares. Accordingly, the public offering price has been determined by
negotiations between the Trust and Brookstreet. Among the factors which were
considered in determining the IPO Price were the Trust's future prospects, the
experience of its management, the offering prices of the Trust's predecessors'
shares, the book value and earnings of the Trust's Shares, the economic
condition of the financial services industry in general, the general condition
of the equity securities market, the demand for similar securities of companies
considered comparable to the Trust and other relevant factors. The President of
Brookstreet serves as a Director of the Trust.
All subscription funds will be held in a separate escrow account with
Golden Gate Bank, San Francisco, California, pending the Trust's receipt of
Share subscriptions totaling the Minimum Subscription Level of $500,000 (or such
other amount as the NASD may approve). Assuming all escrow conditions are
satisfied, cleared funds representing investors' subscriptions will be paid to
the Trust. Net Escrow Interest will at the end of the escrow generally be paid
to Shareholders, although the interest of each Shareholder participating in the
Trust's DRP will be invested in additional Shares of the same class as that
purchased by such Shareholder. If all conditions of escrow are not satisfied
within twelve months of the date of this Prospectus (unless extended),
subscriptions will be promptly returned to subscribers at the end of the escrow,
together with the Net Escrow Interest. If such escrow conditions are not met,
subscriptions from IRAs, will be promptly returned to the custodian of each IRA
for reinvestment in other permitted investments. Shareholders will be entitled
to their proportionate share of the Net Escrow Interest earned on offering
proceeds during the escrow period based on the amount of their investment and
the time that investment was on deposit in the escrow. However, if a Shareholder
has $5.00 or less of net escrow interest credited to their account, that amount
will be paid over to the Trust.
The Selling Agent Agreement with participating selling agents contains
agreements of indemnification between the Trust and such selling agents as to
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
62
<PAGE> 67
The offering will terminate on a date to be declared by the Board of
Directors. Such date will be no later than two years from the effective date of
this offering.
SALES MATERIAL
Sales material may be used in connection with this offering only when
accompanied or preceded by the delivery of this Prospectus. Only sales material
which indicates that it is distributed by the Trust may be distributed to
prospective investors. In certain states, such sales material may not be
available. The offering is made only by this Prospectus, and the sales material
is qualified in its entirety by reference to this Prospectus. Sales material
does not purport to be complete and should not be considered as a part of this
Prospectus or the Registration Statement, of which this Prospectus is a part, or
as incorporated in this Prospectus or said Registration Statement by reference,
or as forming the basis of the Offering.
63
<PAGE> 68
- --------------------------------------------------------------------------------
LEGAL MATTERS
- --------------------------------------------------------------------------------
The legality of the securities offered hereby has been passed upon for
the Trust by the Trust's special counsel, Wilson, Ryan & Campilongo, San
Francisco, California, which has also reviewed and approved the discussion of
law and legal conclusions set forth in "Federal Tax Considerations", and "ERISA
Investors". (See "Risk Factors: Conflicts of Interest and Related Considerations
- - Lack of Separate Representation"). Certain legal matters will be passed upon
for the Managing Dealer by Thelen, Marrin, Johnson & Bridges, Los Angeles,
California.
64
<PAGE> 69
- --------------------------------------------------------------------------------
EXPERTS
- --------------------------------------------------------------------------------
The balance sheet of the Trust as of April 30, 1996 and the financial
statements of Capital Alliance Income Trust I as of December 31, 1995 and 1994
and for the three years then ended and of Capital Alliance Income Trust II as of
December 31, 1995 and 1994 and for the period from October 18, 1994 (Inception)
to December 31, 1994 and the year ended December 31, 1995, have been included
herein and in the Registration Statement in reliance upon the reports of
Novogradac & Company LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
65
<PAGE> 70
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Copies of the Registration Statement of which this Prospectus forms a
part and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C. and may be obtained at rates prescribed by the Commission upon
request to the Commission and inspected, without charge, at the offices of the
Commission. The Company will be subject to the informational requirements of the
Exchange Act, and in accordance therewith, will periodically file reports and
other information with the Commission. Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W. Washington, D.C. 20549, and at the
Commission's regional offices at Northwestern Atrium Center, 500 West Madison
Street (Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York,
New York 10048. Copies of such material can also be obtained from the Commission
at prescribed rates through its Public Reference Section at 450 Fifth Street,
N.W. Washington D.C. 20549. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
66
<PAGE> 71
- --------------------------------------------------------------------------------
GLOSSARY
- --------------------------------------------------------------------------------
As used in this Prospectus, the capitalized and other terms listed
below have the meanings indicated.
AFFILIATED PERSON means of any entity: (1) any person directly or indirectly
owning, controlling, or holding with the power to vote, 10% or more of the
outstanding securities of such entity; (2) any person 10% or more of whose
outstanding voting securities are directly or indirectly owned, controlled, or
held with power to vote, by such entity; (3) any person directly or indirectly
controlling, controlled by , or under common control with, such entity or (4)
any officer, director or employee of such entity or any person set forth in (1),
(2), or (3) above. Any person who owns beneficially, either directly or through
one or more controlled companies, more than 25% of the voting securities of any
entity shall be presumed to control such entity. Any person who does not so own
more than 25% of the voting securities of any entity shall be presumed not to
control such entity. A natural person shall be presumed not to be a controlled
entity.
ADJUSTED NET CAPITAL CONTRIBUTION shall mean, with reference to each Share of
either Series A Preferred Stock or Common Stock as of any given date, regardless
of the date of issuance of the amount paid therefor, the Net Capital
Contribution with respect to such Share reduced by the amount of Distributions
of Cash from Sales thereafter paid or declared per Share with respect to Shares
of the same class or series.
AGENCY means FNMA, FHLMC or GNMA.
AGGREGATE ADJUSTED NET CAPITAL CONTRIBUTIONS as of any given date shall mean
with reference to either Series A Preferred or Common Stock, the product of the
Adjusted Net Capital Contributions of each share of the Class and the number of
outstanding shares of such class, each as of a given date.
APPRAISED VALUE shall mean the value according to an appraisal made by an
independent Qualified Appraiser. An "independent" appraiser is one who is not
"controlled" by the Directors, the Manager or its Affiliates. For purposes of
the foregoing sentence, the term "control" shall have the meaning ascribed to it
in Rule 405 under the Securities Act of 1933, as amended.
"ARM" means a mortgage loan that features adjustments of the underlying interest
rate at predetermined times based on an agreed margin to an established index. A
ARM is usually subject to periodic interest rate and/or payment caps and a
lifetime interest rate cap.
BANKRUPTCY CODE means Title 11, United States Code, as amended.
"CAAI" means Capital Alliance Advisors, Inc., a California corporation.
"CAIT" means Capital Alliance Income Trust, a Real Estate Investment Trust, a
Delaware corporation.
CASH FLOW for any Fiscal Quarter or Fiscal year or other period shall mean (i)
the sum of cash receipts from operations and investments, including, but no
limited to, interest earned on the Trust's investments in Home Equity Loans or
other mortgage loans, including Cash from Sales to the extent not distributed to
Shareholders as a return of capital; minus (ii) all cash expenses and costs
incurred and paid in connection with the ownership, servicing and management of
Home Equity Loans or other mortgage loans held by the Trust, including, but not
limited to , fees payable to the Manager or its Affiliates to the extent not
deferred, insurance premiums, accounting and legal fees and expenses; debt
collection expenses; property taxes or other charges, assessments or levies
imposed on or with respect to Home Equity Loans or other mortgage loans held by
the Trust; debt service (but not including depreciation or amortization of
capital expenditures), including, without limitation, organization expenses.
CASH FROM SALES shall mean cash proceeds realized by the Trust (excluding sales
by any non-qualified REIT subsidiary of the Trust) from the sale, exchange or
other disposition of any of its portfolio of Home Equity Loans or other mortgage
loans (or a portion thereof), sale of foreclosure property and other assets, net
of any expenses associated with such sale or other
67
<PAGE> 72
set-offs, reserves or holdbacks. Cash from Sales shall include cash funds from
reserves which the Board of Directors determines, in its sole discretion, may be
distributed to the Shareholders.
CODE means the Internal Revenue Code of 1986, as amended.
COMBINED LOAN-TO-VALUE RATIO means the total or combined loan-to-value ratio
(including both the mortgage loan and any senior liens encumbering a property).
COMMISSION means the Securities and Exchange Commission.
CONFORMING LOAN or CONFORMING MORTGAGE LOAN means a mortgage loan that complies
with requirements for inclusion in credit support programs sponsored by FHLMC or
FNMA which are secured by first or second mortgages or deeds of trust on
single-family (one to four units) residences.
CONTRIBUTION means any money, property or services rendered, or obligation to
contribute property, or other valuable consideration as permitted by the
Delaware General Corporation Law, which a Series "A" Preferred or Common
Shareholder contributes to the Trust as capital in that shareholder's capacity
as Shareholder.
DISTRIBUTABLE CASH FLOW means Cash Flow less such amounts as the Directors, in
their sole discretion, determines should be set aside for the establishment,
restoration or enhancement of reserves.
DISTRIBUTION PREFERENCE shall mean the Series "A" Preferred Preference Amount.
DISTRIBUTIONS means any transfer of money or property by the Trust to a
Shareholder without consideration.
"DRP" means Dividend Reinvestment Plan.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ERISA PLAN" or "PLAN" means a pension, profit-sharing, retirement or other
employee benefit plan which is subject to ERISA.
EXCESS DISTRIBUTIONS for any fiscal year means Distributions of Distributable
Cash Flow declared by the Directors, after all distributions on the Series A
Preferred Shares and the Common Shares required by the Certificate of
Incorporation of the Trust have been declared to the holders of the Series A
Preferred Shares and the Common Shares.
EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
"FHA" means the United States Federal Housing Administration.
"FHLMC" means the Federal home Loan Mortgage Corporation.
"FNMA" means the Federal National Mortgage Association.
"GNMA" means Government National Mortgage Association.
"GAAP" means generally accepted accounting principles.
GROSS MORTGAGE ASSETS means for any month the aggregate book value of the
Mortgage Assets, before reserves for depreciation or bad debts or other similar
noncash reserves, computed at the end of such month.
HOME EQUITY LOAN means any home equity loan secured by a Mortgage upon a parcel
of improved well-located residential property of one to four living units in the
States of California, Oregon, Washington, Nevada, Utah and Colorado, which loan
68
<PAGE> 73
is acquired by the Trust and which is secured primarily by a second Mortgage,
although a portion of such loans may be secured by first and/or third mortgages.
INVESTMENT COMPANY ACT means the Investment Company Act of 1940, as amended.
"IRAS" means Individual Retirement Accounts.
KEOGH PLANS means H.R. 10 Plans.
"LTV" or "LOAN-TO-VALUE RATIO" means the percentage obtained by dividing the
principal amount of a loan by the appraised value of the mortgaged property when
the loan is originated.
MANAGER is CAAI and its successor in interest.
MORTGAGE means mortgages, deeds of trust or other security deeds on real
property or rights or interest in real property.
MORTGAGE ASSETS means (1) Mortgage Loans, (2) investment in mortgage banking
firms or mortgage-backed securities, and (3) other mortgage interests.
MORTGAGE CONDUIT BUSINESS means the wholesale mortgage banking business
conducted by the Mortgage Conduit Subsidiary of the Trust which is a
non-qualified REIT Subsidiary.
MORTGAGE INVESTMENT BUSINESS is the mortgage portfolio lending business
conducted directly by the Trust.
MORTGAGE LOANS means both conforming mortgage loans and non-conforming mortgage
loans.
MORTGAGE CONDUIT SUBSIDIARY is a non-qualified REIT Subsidiary to be formed by
the Trust to conduct the Mortgage Conduit Business of the Trust.
MORTGAGE-BACKED SECURITIES means (1) Pass-Through Certificates, (2) CMOs and (3)
REMICs.
"NASD" means the National Association of Securities Dealers.
"NASDAQ" or "NASDAQ-NMS" means the NASDAQ National Market System of the NASD.
NET ASSET VALUE means the aggregate of the book value of all Home Equity Loans
and other mortgage loans plus other corporate assets less all liabilities and
bad debt reserves of the Trust.
NET CAPITAL CONTRIBUTIONS means, with respect to a Series A Preferred Share
and/or Common Share, the gross price per Share to the Shareholder upon the
original issuance of such Shares, less the Sales Charge attributable to such
Share.
NET ESCROW INTEREST means interest earned on subscriptions placed in Escrow
until the Minimum Subscription Level is reached and the Escrow is terminated.
NET INCOME means the net income of the Trust determined in accordance with GAAP
before the deduction for dividends paid, and any net operating loss deductions
arising from losses in prior periods. The Trust's interest expenses for borrowed
money shall be deducted in calculating Net Income.
90% TEST means the underwriting calculations used in the Trust's Mortgage
Investment Business to determine the relationship of a property's appraised
value and the cost of carrying each mortgage or Home Equity Loan for 12 months
assuming that there is a foreclosure on the mortgaged property. If the cost of
carrying the property for 12 months (i.e. including the costs of keeping any
prior mortgage current, foreclosure costs, selling and repair costs) exceeds 90%
of the appraised value at the time of projected funding, the loan will not be
made.
69
<PAGE> 74
NON-CONFORMING LOAN or NON-CONFORMING MORTGAGE LOAN means a mortgage loan that
does not qualify for purchase by government-sponsored entities such as FNMA and
FHLMC.
NON-QUALIFIED REIT SUBSIDIARY means a corporation in which a REIT owns less than
all of the stock during such corporation's existence.
OWNERSHIP LIMIT means 9.8% (in value or in number of shares, which ever is more
restrictive) of the aggregate of the outstanding shares of Common Stock and
Series "A" Preferred Stock, as may be increased or reduced by the Board of
Directors of the Trust.
PREFERRED SHARES are the Series "A" Preferred Shares of the Trust.
PRIME RATE means, during any calendar month, the Prime Rate (or base rate)
reported in the Money Rates column of the Wall Street Journal published on the
first business day of each month. In the event the Wall Street Journal ceases
publication of the Prime Rate, the Prime Rate shall mean the Prime Rate (or base
rate) in effect for Bank of America, San Francisco, California, on the first
business day of each month.
QUALIFIED APPRAISER means an appraiser who (i) is approved by the Manager or
Board of Directors, (ii) is registered on the approved appraiser list of at
least four lending institutions, (iii) maintains at least $500,000 in errors and
omissions insurance, and (iv) demonstrates qualification by membership in a
recognized appraisal society or otherwise to the satisfaction of the Manager or
Board of Directors.
QUALIFIED REIT ASSETS means Mortgage Loans and other assets of the type
described in Code Section 856(c)(6)(B).
QUALIFIED REIT SUBSIDIARY means a corporation whose stock is entirely owned by
the REIT at all times during such corporation's existence.
QUALIFYING INTERESTS means "mortgages and other liens on and interests in real
estate," as defined in Section 3(c)(5)(C) under the Investment Company Act.
REAL ESTATE ASSET means interest in real property and interest in mortgages on
real property.
"REIT" means Real Estate Investment Trust as defined under Section 856 of the
Code.
REVERSE REPURCHASE AGREEMENT means a borrowing device by an agreement to sell
securities or other assets to a third party and a simultaneous agreement to
repurchase them at a specified future date and price, the price difference
constituting the interest on the borrowing.
SALES CHARGE means the amount of compensation paid to Broker/Dealers by the
Trust and its predecessor entities pursuant to the selected selling agent
agreements and to others in connection with the offer and sale of Shares.
SECURITIES ACT means the Securities Act of 1933, as amended.
SELLING AGENT means any broker/dealer who has executed a selected agent
agreement in connection with the sale of Shares by the Trust, in which such
Broker/Dealer agrees to participate in the offer and sale of Shares.
SERIES A PREFERRED SHARES shall mean the Shares described in the Trust's
Certificate of Incorporation.
SERIES A PREFERRED PREFERENCE AMOUNT for each calendar month shall mean
one-twelfth (1/12th) of the product of (i) the lesser of (a) 10.25% or (b) 150
basis points plus the Prime Rate times (ii) the Aggregate Adjusted Net Capital
Contributions of the Series A Preferred Shares calculated as of the Distribution
record date falling within that period.
SERIES A PREFERRED SHAREHOLDERS shall mean the holders of Series A Preferred
Shares.
70
<PAGE> 75
SERVICE means the United States Internal Revenue Service.
SHARES means Common Shares and/or Series "A" Preferred Shares of the Trust.
TAX EXEMPT ENTITY means a qualified pension, profit-sharing or other employee
retirement benefit plan, Keogh Plan, bank commingled trust fund for such plans,
an IRA or other similar entity intended to be exempt from Federal income
taxation.
TAXABLE INCOME means for any year the taxable income of the Trust for such year
(excluding any net income derived either from property held primarily for sale
to customers or from foreclosure property) subject to certain adjustments
provided in Section 857 of the Code.
"UBTI" means "unrelated trade or business taxable income" as defined in Section
512 of the Code.
UNAFFILIATED DIRECTOR means a director who is independent of the Trust, any
Manager of the Trust (including CAAI) and CAAI and its Affiliated Persons.
71
<PAGE> 76
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
The Directors intend to adopt the Capital Alliance Income Trust
Dividend Reinvestment Plan (the "Plan") as set forth below.
1. Administrative Agent. As administrative agent for participating
shareholders (the "Participants") in the Plan, _______________________ (the
"Administrative Agent") will maintain records and perform all bookkeeping and
other administrative functions for the Plan. The Administrative Agent's
functions shall include: (i) recording stock dividends, stock splits or other
distributions declared by the Trust, (ii) disbursing funds to the purchasing
agent for the purchase of additional shares, (iii) issuing share certificates to
Participants, when requested, and (iv) distributing reports to Participants.
2. Purchasing Agent. As purchasing agent for Participants in the Plan,
________________________ (the "Purchasing Agent") will receive all or a
designated portion of the past dividends paid on the shares of common stock of
the Trust (the"Shares") held by each Participant, including dividends paid on
any full or fractional Shares acquired under the Plan. After deducting
applicable brokerage and administrative charges as set forth in Sections 7 and
8, below, the Purchasing Agent will apply such funds as set forth below towards
the purchase of additional Shares.
After the Minimum Subscription Level has been reached and during the
balance of the Initial Public Offering, Shares shall be purchased from the Trust
at $9.60 per share. Such purchases shall be deemed made as of the pay date of
each dividend declared. After termination of the Initial Public Offering and
trading in the Shares has begun on NASDAQ NMS Shares for the Plan will be
purchased at existing market prices.
The Purchasing Agent is entirely independent of the Trust and does not
directly or indirectly control, and is not controlled by or under common control
with the Trust. Neither the Trust nor any of its affiliates will exercise any
control over the times when, or the prices at which, shares may be purchased or
sold by the Purchasing Agent, the amounts of shares to be purchased, the manner
in which purchases are made, or the selection of the broker or dealer (other
than the Purchasing Agent itself ) through, from or to whom the purchases are
made.
3. Purchase of Shares. In making purchases for the Participants'
accounts, the Purchasing Agent may commingle the funds of any Participant with
those of other Participants. Shares shall be deemed to have been acquired for a
Participant's account prior to the commencement of trading on the NASDAQ NMS at
the offering price. The price at which Shares will be deemed to have been
acquired for a Participant's account after the Shares commence trading on the
NASDAQ NMS; shall be the average price (including the administrative and
brokerage charges specified in paragraphs 7 and 8 below) of all Shares purchased
for the Participants in the Plan with the proceeds of a single cash dividend.
Such dividends of the Trust shall be invested by the Purchasing Agent promptly
following such dividend payment date, and in no event later than 30 days from
such receipt.
The Trust, the Administrative Agent, and the Purchasing Agent shall
have no responsibility as to the value of the Trust's Shares or any change in
the value of the Shares acquired for the Participant's account.
4. Interim Funds. Pending investment, funds may be held in a
money-market fund or funds of Purchasing Agent's selection pending such
investment; with all interest accruing for the benefit of the Participants.
5. Shareholder Participation and Accounts. Shareholders will
automatically become Participants in the Plan unless electing to receive cash
distributions in the appropriate place on the order form for the purchase of
Shares pursuant to the Initial Public Offering, or by sending a written request
to the Administrative Agent, who will maintain a capital account for each
Participant of the Plan. Whole and fractional Shares purchased on behalf of the
Participant by the Purchasing Agent pursuant to the Plan will be credited to the
Participant's account as "unissued certificate" Shares. No Share certificate
will be issued to a Participant for Shares credited to his capital account,
unless the Participant requests otherwise. Such requests must be made in writing
to the Administrative Agent. The Administrative Agent will mail a confirmation
of account to each Participant describing the cash dividends available for
reinvestment, the number and class of Shares purchased, administrative charges
incurred, the purchase price per Share, and the total Shares accumulated under
the plan each fiscal quarter.
72
<PAGE> 77
6. Proxy Solicitation. The Administrative Agent will distribute to the
Participants any proxy solicitation material received by it from the Trust
attributable to Shares in the Plan, and will only vote the Shares in
Participants' accounts in accordance with the instructions of each respective
Participant. Inc the absence of instructions, the Administrative Agent will not
vote such Shares.
7. Brokerage Charges. The charge to each Participant for services
rendered by the Purchasing Agent shall be competitive securities brokerage
commissions payable in connection with purchase of Shares for the Plan.
8. Administrative Charges. Initially, the charge to each Participant
for the service of the Administrative Agent shall be 5% of the reinvestment
amount in the case of investment of quarterly dividends with a minimum of $.50
and a maximum of $3.00.
9. No Drawing. No Participant shall have any right to draw checks or
drafts against his account or to give instructions to the Trust or the
Purchasing Agent or the Administrative Agent, except as expressly provided
herein.
10. Income Taxes. Under current law, reinvestment of dividends will not
receive a Participant of any income tax which may be payable on such dividends.
11. Termination. A Participant may terminate his participation in the
Plan at any time by written notice to the Administrative Agent. To be effective
for any dividend payment, such notice must be received by the Administrative
Agent before the record date for such payment. The Administrative Agent may
terminate a Participant's individual participation in the Plan, and the Trust or
the Administrative Agent may terminate the Plan itself for any reason, at any
time, by written notice mailed to a Participant, or to all Participants, as the
case may be, at the address or addresses shown on their account. Upon any such
termination, the Administrative Agent will send a statement showing the balance
of issued and unissued Share certificates remaining in the Participant's capital
account. Any future distributions made after the effective date of the
termination will be sent directly to the shareholder.
12. Address of Administrative Agent. All notices and other
communications should be sent to:
Capital Alliance Income Trust
c/o_______________________________________
__________________________________________
__________________________________________
13. Stock Dividends, Stock Splits and Rights Offerings. It is understood
that any stock dividend or stock split declared by the Trust on Shares held by
the Administrative Agent for a Participant will be credited to the Participant's
account without charge. Any rights to purchase additional Share accruing on
Shares in the Plan will be exercisable by the Participant.
14. Non-Liability. The Trust, the Administrative Agent, and the
Purchasing Agent shall not be liable hereunder for any act done in good faith,
or for any good faith omission to act, including, without limitation, any claims
of liability (a) arising out of failure to terminate a Participant's account
upon such Participant's death prior to receipt of notice in writing of such
death, and (b) with respect to the time and the prices at which Shares are
purchased for a Participant's account.
15. Change of Address. Each Participant agrees to notify the
Administrative Agent promptly in writing of any change of address. Notices to
the Participant may be given by letter addressed to the Participant at his last
address of record with the Administrative Agent.
73
<PAGE> 78
16. Amendment. This plan may be amended or supplemented by agreement
between the Purchasing Agent, the Trust and the Administrative Agent at anytime,
including, but not limited to, an amendment to the Plan to: (a) add a voluntary
cash contribution feature, (b) substitute a new purchasing agent for the
Participants, or (c) change the Purchasing Agent's brokerage charges, or the
Administrative Agent's charges, by mailing an appropriate notice to each
Participant at his last address of record at least 30 days prior to the record
date for any dividend to which the changes will apply. such Amendment or
supplement shall b deemed conclusively accepted by each Participant, except
those Participants who give written notice of termination prior to the effective
date hereof.
17. Governing Law. This Plan will be governed by the laws of the State
of California.
74
<PAGE> 79
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CAPITAL ALLIANCE INCOME TRUST, A REAL ESTATE INVESTMENT TRUST
Independent Auditors' Report F-2
Pro-Forma Combined Balance Sheets F-3
Pro-Forma Combined Statements of Operations F-5
Pro-Forma Combined Statements of Changes in Stockholders' Equity F-6
Pro-Forma Combined Statements of Cash Flows F-7
Notes to Pro-Forma Combined Financial Statements F-9
Appendix A F-13
CAPITAL ALLIANCE INCOME TRUST I
Independent Auditors' Report F-16
Balance Sheets F-17
Statements of Income F-18
Statements of Corpus F-19
Statements of Cash Flows F-20
Notes to Financial Statements F-22
Appendix A F-26
CAPITAL ALLIANCE INCOME TRUST II
Independent Auditors' Report F-29
Balance Sheets F-30
Statements of Income F-31
Statements of Corpus F-32
Statements of Cash Flows F-33
Notes to Financial Statements F-35
Appendix A F-38
75
<PAGE> 80
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
PRO-FORMA COMBINED FINANCIAL STATEMENTS
with
Independent Auditors' Report
April 30, 1996
76 F-1
<PAGE> 81
[NOVOGRADAC & COMPANY LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Capital Alliance Income Trust,
A Real Estate Investment Trust:
We have audited the accompanying balance sheet of Capital Alliance Income Trust,
A Real Estate Investment Trust at April 30, 1996. This financial statement is
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Capital Alliance Income Trust, A
Real Estate Investment Trust at April 30, 1996, in conformity with generally
accepted accounting principles.
/s/ Novogradac & Company LLP
June 25, 1996
77 F-2
<PAGE> 82
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
PRO-FORMA COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro-Forma
--------------------------------------
December 31,
------------------------ April 30, April 30,
1994 1995 1996 1996
---------- ---------- ---------- ----------
(Unaudited) (1)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $1,221,965 $ 829,978 $1,037,271 $1,037,271
Restricted cash 19,542 94,222 186,268 186,268
Accounts receivable (net of bad debt
allowance of $12,000 in 1995 and
$32,000 in 1996) 16,596 61,758 85,491 82,741
Subscriptions receivable -- 265,511 -- --
Investments -- 200,000 200,000 200,000
Mortgage notes receivable 1,889,485 4,802,070 4,757,895 4,757,895
Organization costs (net of accumulated
amortization of $1,727 for 1994 and
$2,287 for 1995 and $2,474 for 1996) 1,073 513 326 5,442
---------- ---------- ---------- ----------
Total assets $3,148,661 $6,254,052 $6,267,251 $6,269,617
========== ========== ========== ==========
</TABLE>
(1) Reflects consolidation of Trusts I and II and exchange of shares - see note
9.
See accompanying notes to pro-forma combined financial statements.
78 F-3
<PAGE> 83
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
PRO-FORMA COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro-Forma
--------------------------------------
December 31,
------------------------ April 30, April 30,
1994 1995 1996 1996
---------- ---------- ---------- ----------
(Unaudited) (1)
<S> <C> <C> <C> <C>
Liabilities and Stockholders' equity
Liabilities
Mortgage note holdback $ 19,555 $ 94,282 $ 186,327 $ 186,327
Due to affiliates 36,186 51,471 61,947 64,313
Other liabilities -- 18,269 15,042 15,909
---------- ---------- ---------- ----------
Total liabilities 55,741 164,022 263,316 266,549
---------- ---------- ---------- ----------
Stockholders' Equity
Class "A" shares, $9.50 stated value,
unlimited shares of beneficial interest
authorized, 325,392.02, 641,932.13 and
636,937.33 shares issued and
outstanding at December 31, 1994
and 1995 and April 30, 1996, 3,090,923 6,087,073 6,001,938 --
respectively
Class "B" shares, no par value, three
shares of beneficial interest authorized,
one share issued and outstanding at
December 31, 1994 and 1995 and
April 30, 1996, respectively 1,997 2,957 1,997 --
Preferred stock, $.01 par value
675,000 shares authorized; none issued
and outstanding at December 31, 1994
and 1995 and 643,730 shares issued and
outstanding at April 30, 1996 -- -- 6,437
Common stock, $.01 par value
2 million shares authorized; none issued
and outstanding at December 31, 1994
and 1995 and at April 30, 1996 -- -- -- --
Additional paid in capital -- -- -- 5,996,631
---------- ---------- ---------- ----------
Total stockholders' equity 3,092,920 6,090,030 6,003,935 6,003,068
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $3,148,661 $6,254,052 $6,267,251 $6,269,617
========== ========== ========== ==========
</TABLE>
(1) Reflects consolidation of Trusts I and II and exchange of shares - see note
9.
See accompanying notes to pro-forma combined financial statements.
79 F-4
<PAGE> 84
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
PRO-FORMA COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Four Months Ended
Years Ended December 31, April 30,
-------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income $ 99,124 $156,210 $463,133 $121,545 $242,136
Other income 1,458 797 26,230 77 31,573
-------- -------- -------- -------- --------
Total revenues 100,582 157,007 489,363 121,622 273,709
-------- -------- -------- -------- --------
EXPENSES
Loan servicing fees 8,578 17,676 43,165 10,328 20,107
General and administrative 8,282 10,265 31,784 17,533 26,959
-------- -------- -------- -------- --------
Total expenses 16,860 27,941 74,949 27,861 47,066
-------- -------- -------- -------- --------
NET INCOME BEFORE GAIN ON SALE
OF FORECLOSED ASSETS 83,722 129,066 414,414 93,761 226,643
GAIN ON FORECLOSED ASSETS -- 17,990 -- -- --
-------- -------- -------- -------- --------
NET INCOME $ 83,722 $147,056 $414,414 $ 93,761 $226,643
======== ======== ======== ======== ========
NET INCOME PER PREFERRED SHARE 0.934 0.823 0.938 0.267 0.350
WEIGHTED AVERAGE PREFERRED
SHARES OUTSTANDING 89,644 178,689 442,026 350,655 646,971
</TABLE>
See accompanying notes to pro-forma combined financial statements.
80 F-5
<PAGE> 85
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
PRO-FORMA COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
------------------------- -------
Shares Amount Amount Total
---------- ----------- ------- -----------
<S> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1993 71,515.20 $ 679,087 $ 997 $ 680,084
Corpus contributed 40,902.74 388,576 -- 388,576
Organizational and offering costs (2,782.13) (26,424) -- (26,424)
Dividends -- (82,885) (837) (83,722)
Net income, 1993 -- 82,885 837 83,722
---------- ----------- ------- -----------
BALANCE AS OF DECEMBER 31, 1993 109,635.81 1,041,239 997 1,042,236
Corpus contributed 231,764.95 2,201,767 1,000 2,202,767
Organizational and offering costs (16,008.74) (152,083) -- (152,083)
Dividends -- (145,585) (1,471) (147,056)
Net income, 1994 -- 145,585 1,471 147,056
---------- ----------- ------- -----------
BALANCE AS OF DECEMBER 31, 1994 325,392.02 3,090,923 1,997 3,092,920
Corpus contributed 337,578.84 3,206,999 -- 3,206,999
Organizational and offering costs (21,038.73) (199,868) -- (199,868)
Dividends -- (421,251) (3,184) (424,435)
Net income, 1995 -- 410,270 4,144 414,414
---------- ----------- ------- -----------
BALANCE AS OF DECEMBER 31, 1995 641,932.13 6,087,073 2,957 6,090,030
Redemption of class "A" shares (4,402.69) (44,825) -- (44,825)
Organizational and offering costs (592.11) (5,625) -- (5,625)
Dividends -- (259,061) (3,227) (262,288)
Net income, four months ended
April 30 ,1996 -- 224,376 2,267 226,643
---------- ----------- ------- -----------
BALANCE AS OF APRIL 30, 1996 636,937.33 $ 6,001,938 $ 1,997 $ 6,003,935
========== =========== ======= ===========
</TABLE>
See accompanying notes to pro-forma combined financial statements.
81 F-6
<PAGE> 86
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
PRO-FORMA COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1993 1994 1995
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 83,722 $ 147,056 $ 414,414
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization 560 560 560
(Increase) decrease in restricted cash -- (19,542) 922
Increase in accounts receivable (5,333) (6,753) (57,162)
Increase in allowance for bad debts -- -- 12,000
Increase (decrease) in mortgage note holdback -- 19,555 (875)
Increase in due to affiliates 26,892 7,167 15,285
Increase (decrease) in other liabilities (14,333) (250) 18,269
--------- ----------- -----------
Net cash provided by operating activities 91,508 147,793 403,413
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in investments -- -- (200,000)
Investments in mortgage loans (434,500) (1,569,985) (3,740,011)
Repayments of mortgage loans 338,000 301,000 827,426
--------- ----------- -----------
Net cash used in investing activities (96,500) (1,268,985) (3,112,585)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 388,576 2,202,767 2,941,488
Organizational and offering costs (26,424) (152,083) (199,868)
Dividends paid (83,722) (147,056) (424,435)
--------- ----------- -----------
Net cash provided by financing activities 278,430 1,903,628 2,317,185
--------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 273,438 782,436 (391,987)
CASH AT BEGINNING OF YEAR 166,091 439,529 1,221,965
--------- ----------- -----------
CASH AT END OF YEAR $ 439,529 $ 1,221,965 $ 829,978
========= =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ 45,304 $ --
</TABLE>
See accompanying notes to pro-forma combined financial statements.
82 F-7
<PAGE> 87
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
PRO-FORMA COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Four Months Ended
April 30,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 93,761 $ 226,643
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization -- 187
Increase in restricted cash (7,524) (92,046)
Increase in accounts receivable (18,138) (43,733)
Increase in allowance for bad debts 8,000 20,000
Increase in mortgage note holdback 7,525 92,045
Increase (decrease) in due to affiliates (28,751) 10,476
Decrease in other liabilities -- (3,227)
----------- -----------
Net cash provided by operating activities 54,873 210,345
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in mortgage loans (1,284,255) (1,022,056)
Repayments of mortgage loans 102,528 1,066,231
----------- -----------
Net cash provided by (used in) investing activities (1,181,727) 44,175
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 608,345 265,511
Redemption of shares -- (44,825)
Organizational and offering costs (38,389) (5,625)
Dividends paid (105,237) (262,288)
----------- -----------
Net cash provided by (used in) financing activities 464,719 (47,227)
----------- -----------
NET INCREASE (DECREASE) IN CASH (662,135) 207,293
CASH AT BEGINNING OF YEAR 1,221,965 829,978
----------- -----------
CASH AT END OF YEAR $ 559,830 $ 1,037,271
=========== ===========
</TABLE>
See accompanying notes to pro-forma combined financial statements.
83 F-8
<PAGE> 88
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO PRO-FORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
For the four months ended April 30, 1995 and 1996
and the three-year period ended December 31, 1995
1. Organization
Capital Alliance Income Trust, A Real Estate Investment Trust, a Delaware
corporation (the "Corporation") was formed December 12, 1995 to facilitate
the consolidation of the mortgage investment operations of Capital Alliance
Income Trust I, a Delaware business trust, and Capital Alliance Income
Trust II, a Delaware business trust, (collectively referred to as the
"Trusts", individually referred to as "Trust I" and "Trust II",
respectively). Trust I and Trust II were both privately-held mortgage
investment trusts which invested primarily in loans secured by deeds of
trust on one-to-four unit residential properties. The Manager, Capital
Alliance Advisors, Inc. (the "Manager") originates, services and sells the
Corporation's loans.
Prior to April 30, the historical results and operations of the Trusts have
been combined in the accompanying pro-forma combined financial statements.
The effective date of the combination (the "Combination") was April 30,
1996, pursuant to the issuance of a permit by the California Commissioner
of Corporations which qualified the issuance of the preferred shares of the
Corporation issued in the consolidation. Under the Agreement and Plan of
Reorganization and Consolidation among the Corporation and the Trusts, each
outstanding share of the Trusts' Class "A" shares was converted into one
(1) share of the Corporation's Series A Preferred ("CAIT Preferred") and
each outstanding share of the Trusts' Class "B" shares was converted into
the number of shares of CAIT Preferred equal to one percent (1%) of the
total number of shares of CAIT Preferred to be issued in the consolidation
of the Trusts.
At April 30, 1996, the Corporation exchanged 347,715 and 296,015 shares of
CAIT Preferred to Trust I and Trust II, respectively, for all whole shares
of the Trusts' outstanding Class "A" and Class "B" shares. Thereafter, all
assets and liabilities of the Trusts were transferred to the Corporation.
2. Basis of presentation
The operations of the Trusts have been combined with the Corporation under
the purchase method of accounting under Accounting Principles Board Opinion
No. 16, "Business Combinations," at April 30, 1996, the date of
consolidation of Trust I and Trust II. The preceding pro-forma combined
financial statements reflect the historical operations of Trust I and Trust
II as if the combination was effective for all periods presented.
Since Trust II was formed in late 1994 and did not begin operations until
1995, the historical operations of Trust II are reflected in the combined
financial statements beginning in 1995.
84 F-9
<PAGE> 89
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO PRO-FORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
For the four months ended April 30, 1995 and 1996
and the three-year period ended December 31, 1995
3. Summary of significant accounting policies
Cash and cash equivalents. Cash and cash equivalents include cash and
liquid investments with an original maturity of three months or less. The
Corporation deposits cash in financial institutions insured by the Federal
Deposit Insurance Corporation. At times, the Corporation's account balances
may exceed the insured limits.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Investment. The Corporation records its investment in a related entity at
cost. This entity is a wholesale mortgage firm which originates and sells
residential mortgage loans secured by one-to-four unit residential
properties.
Income taxes. The Corporation intends at all times to qualify as a real
estate investment trust under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended. Therefore, the Corporation will not be
subject to federal income tax provided it distributes at least 95% of its
annual real estate investment trust taxable income to its shareholders and
meets other requirements to continue to qualify as a real estate investment
trust. Accordingly, no provision for federal income taxes has been made in
the financial statements.
Bad debt allowance. Management reviews its provision for bad debt
periodically and the Corporation maintains an allowance for losses on
mortgage notes receivable at an amount that management believes is
sufficient to protect against losses in the loan portfolio. Accounts
receivable deemed uncollectible are written off or reserved.
Fair value of financial instruments. For cash and cash equivalents, the
carrying amount is a reasonable estimate of fair value. For mortgage note
receivables, fair value is estimated by discounting the future cash flows
using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. It was determined that the difference between the carrying
amount and the fair value of the mortgage notes receivable is immaterial.
Organizational and offering costs. Organization costs are capitalized and
amortized on a straight-line basis over five years. Organizational and
offering costs are recorded as a reduction of class "A" corpus and are
neither deductible nor amortizable.
Earnings per share. Pro-forma earnings per preferred share is based on
weighted average shares outstanding assuming the exchange had taken place
at the beginning of all periods presented.
85 F-10
<PAGE> 90
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO PRO-FORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
For the four months ended April 30, 1995 and 1996
and the three-year period ended December 31, 1995
4. Mortgage note holdback
Pursuant to mortgage loan agreements between the Corporation and its
borrowers, a portion of the loan proceeds are held by the Corporation until
certain improvements on the secured property are completed by the borrower.
As of December 31, 1994 and 1995 and April 30, 1996, mortgage note
holdbacks from the consummation of mortgage loans made amounted to $19,555,
$94,282 and $186,327, respectively.
5. Mortgage notes receivable
Mortgage notes receivable represent transactions with customers in which
the Corporation has invested in home equity loans on residential real
estate. The Corporation is subject to the risks inherent in finance lending
including the risk of borrower default and bankruptcy. A summary of the
Corporation's mortgage notes receivable at April 30, 1996 is provided in
Appendix A.
Mortgage notes receivable are stated at the principal outstanding. Interest
on the mortgages is due monthly and principal is due as a balloon payment
at loan maturity. The notes are secured by deeds of trust on residential
properties located primarily in California which results in a concentration
of credit risk. The value of the loan portfolio may be affected by changes
in the economy or other conditions of the geographical area.
6. Accounts receivable
Accounts receivable consists of accrued interest on mortgage notes
receivable and other amounts due from borrowers. Activity in the allowance
for bad debt on accounts receivable was as follows:
<TABLE>
<CAPTION>
December 31, April 30,
-------------------------------- ------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $--- $--- $ --- $ --- $12,000
Provision for bad debt --- --- 12,000 8,000 20,000
---- ---- ------- ------ -------
Balance, end of period $--- $--- $12,000 $8,000 $32,000
==== ==== ======= ====== =======
</TABLE>
7. Subscriptions receivable
As of December 31, 1995, shareholders owed the Corporation $265,511 for
capital contributions to the Corporation. Prior to the issuance of the
Trusts' December 31, 1995 audited financial statements, amounts outstanding
as of December 31, 1995 were collected.
86 F-11
<PAGE> 91
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
NOTES TO PRO-FORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
For the four months ended April 30, 1995 and
1996 and the three-year period ended December 31, 1995
8. Related party transactions
The Manager, which is owned by several of the Trustees and their
affiliates, has contracted with the Corporation to provide loan
administration and mortgage origination services, and receives fees for
these services from the Corporation and from borrowers. The Manager is also
entitled to reimbursement for clerical and administrative services. The
Corporation's predecessors paid loan servicing fees of $8,578, $17,676 and
$43,165 during 1993, 1994 and 1995, respectively, to the Manager. During
the four months ended April 30, 1995 and 1996, the Corporation's
predecessors paid $10,328 and $20,107, respectively, to the Manager.
The Corporation's predecessors also paid the Manager $0.20 per share for
organizing the predecessors and marketing their securities. During 1993,
1994 and 1995, the Corporation's predecessors paid $7,758, $44,173 and
$65,552, respectively, to the Manager. For the four months ended April 30,
1995 and 1996, the Corporation's predecessors paid $12,518 and $5,625,
respectively, to the Manager.
In addition, the Corporation's predecessors paid a sales commission of
$0.50 per share to participating broker/dealers, one of which is an
affiliate of the Manager. Total sales commissions paid to the affiliated
broker/dealer was $20,369, $40,835 and $134,316 during 1993, 1994 and 1995,
respectively. For the four months ended April 30, 1995 and 1996, total
sales commissions paid to the affiliated broker/dealer was $25,871 and $0,
respectively. Most of the sales commissions was reallowed to third party
securities broker/dealers or registered representatives.
9. Notes to pro-forma financial data
The following pro-forma adjustments reflect the impact of the Combination
as described in note 1 to the pro-forma combined financial statements.
(1) Reflects the elimination of all assets, liabilities, and equity of
Trust I and Trust II in accordance with the Agreement and Plan of
Reorganization and Consolidation.
(2) Reflects an increase in organization costs associated with the
formation of the Corporation.
(3) Reflects the issuance of 643,730 shares of preferred stock; 347,715
shares to Trust I and 296,015 shares to Trust II.
87 F-12
<PAGE> 92
APPENDIX A
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
MORTGAGE NOTES RECEIVABLE
The Corporation's mortgage notes receivable all relate to conventional loans
secured by deeds of trust on single family residences. The following is a
summary of the Corporation's mortgage notes receivable at April 30, 1996:
<TABLE>
<CAPTION>
Final maturity Periodic Face amount of
Description Interest rate date payment terms Prior liens mortgages
----------- ------------- -------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Individual loans greater than
$142,737 (3% of total mortgage
notes receivable of $4,757,895): 12.75% 03/01/96 $3,185 Second $300,000
14.00% 04/01/98 $3,442 Second $295,000
13.75% 01/01/98 $2,658 First $232,000
12.50% 11/01/97 $2,281 Second $219,000
13.00% 04/01/97 $1,844 First $180,000
13.00% 07/01/96 $1,820 First $168,000
12.50% 11/01/97 $1,625 Second $150,000
Loans from $100,000-$142,737 12.5% to 13.5% 6 to 36 months --- --- ---
Loans from $50,000-$99,999 12.5% to 15.0% 6 to 61 months --- --- ---
Loans from $20,000-$49,999 12.75% to 16.0% 12 to 60 months --- --- ---
</TABLE>
<TABLE>
<CAPTION>
Principal amount
of loans subject
to delinquent
Carrying amount of principal or
Description mortgages interest
----------------- ----------------
<S> <C> <C>
Individual loans greater than
$142,737 (3% of total mortgage
notes receivable of $4,757,895): $ 299,793 $299,793
$ 295,000 $0
$ 232,000 $0
$ 219,000 $0
$ 170,200 $0
$ 168,000 $0
$ 150,000 $0
Loans from $100,000-$142,737 $ 719,600 $135,000
Loans from $50,000-$99,999 $ 2,007,949 $254,197
Loans from $20,000-$49,999 $ 496,353 $150,000
------------
Total Mortgage Notes Receivable at
April 30, 1996 $ 4,757,895
============
</TABLE>
88 F-13
<PAGE> 93
APPENDIX A
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
RECONCILIATION OF MORTGAGE NOTES RECEIVABLE
<TABLE>
<CAPTION>
December 31, April 30,
------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 524,000 $ 620,500 $ 1,889,485 $ 1,889,485 $ 4,802,070
Additions during period:
New mortgage loans 434,500 1,569,985 3,740,011 1,284,255 1,022,056
Deductions during period:
Collections of principal 338,000 --- 827,426 102,528 1,066,231
Foreclosures --- 301,000 --- --- ---
------------------------------------------------- --------------------------------
Balance at close of period $ 620,500 $ 1,889,485 $ 4,802,070 $ 3,071,212 $ 4,757,895
================================================= ================================
</TABLE>
89 F-14
<PAGE> 94
CAPITAL ALLIANCE INCOME TRUST I
FINANCIAL STATEMENTS
with
Independent Auditors' Report
For the Four Months Ended April 30, 1995 and 1996 (Unaudited)
and the Years Ended
December 31, 1993, 1994 and 1995 (Audited)
90 F-15
<PAGE> 95
[NOVOGRADAC & COMPANY LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Capital Alliance Income Trust I:
We have audited the accompanying balance sheets of Capital Alliance Income Trust
I as of December 31, 1995 and 1994, and the related statements of income, corpus
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Alliance Income Trust I
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Novogradac & Company LLP
March 22, 1996
91 F-16
<PAGE> 96
CAPITAL ALLIANCE INCOME TRUST I
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------ April 30,
1994 1995 1996
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $1,220,965 $ 152,029 $ 478,037
Restricted cash 19,542 18,620 113,943
Accounts receivable (net of bad debt allowance
of $12,000 in 1995 and $26,000 in 1996) 16,596 40,112 51,054
Subscriptions receivable -- 62,500 --
Investments -- 100,000 100,000
Mortgage notes receivable 1,889,485 2,952,715 2,663,072
Organization costs (net of accumulated amortization
of $1,727 for 1994 and $2,287 for 1995 and 1,073 513 326
$2,474 for 1996) -- -- --
Total assets $3,147,661 $3,326,489 $3,406,432
========== ========== ==========
LIABILITIES AND CORPUS
Liabilities
Mortgage note holdback $ 19,555 $ 18,680 $ 114,002
Due to affiliates 36,186 28,554 48,061
Other liabilities -- 6,425 11,785
---------- ---------- ----------
Total liabilities 55,741 53,659 173,848
---------- ---------- ----------
Corpus
Class "A" shares, $9.50 stated value, unlimited
shares of beneficial interest authorized,
325,392.02, 344,435.18 and 343,843.07 shares
issued and outstanding at December 31, 1994
and 1995 and April 30, 1996, respectively 3,090,923 3,271,833 3,231,587
Class "B" shares, no par value, three shares of
beneficial interest authorized, one share issued
and outstanding at December 31, 1994 and 1995
and April 30, 1996, respectively 997 997 997
---------- ---------- ----------
Total corpus 3,091,920 3,272,830 3,232,584
---------- ---------- ----------
Total liabilities and corpus $3,147,661 $3,326,489 $3,406,432
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
92 F-17
<PAGE> 97
CAPITAL ALLIANCE INCOME TRUST I
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Four Months Ended
Years Ended December 31, April 30,
-------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income $ 99,124 $156,210 $355,466 $111,198 $139,224
Gain on sale of foreclosed
assets -- 17,990 -- -- --
Other income 1,458 797 21,897 69 15,318
-------- -------- -------- -------- --------
Total revenues 100,582 174,997 377,363 111,267 154,542
-------- -------- -------- -------- --------
EXPENSES
Loan servicing fees 8,578 17,676 31,095 10,328 10,866
General and administrative 8,282 10,265 27,871 15,117 16,606
-------- -------- -------- -------- --------
Total expenses 16,860 27,941 58,966 25,445 27,472
-------- -------- -------- -------- --------
NET INCOME $ 83,722 $147,056 $318,397 $ 85,822 $127,070
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
93 F-18
<PAGE> 98
CAPITAL ALLIANCE INCOME TRUST I
STATEMENTS OF CORPUS
<TABLE>
<CAPTION>
Class A Class B
-------------------------- -------
Shares Amount Amount Total
---------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1993 71,515.20 $ 679,087 $ 997 $ 680,084
Corpus contributed 40,902.74 388,576 -- 388,576
Organizational and offering costs (2,782.13) (26,424) -- (26,424)
Dividends -- (82,885) (837) (83,722)
Net income, 1993 -- 82,885 837 83,722
---------- ----------- ------- -----------
BALANCE AS OF DECEMBER 31, 1993 109,635.81 1,041,239 997 1,042,236
Corpus contributed 231,764.95 2,201,767 -- 2,201,767
Organizational and offering costs (16,008.74) (152,083) -- (152,083)
Dividends -- (145,585) (1,471) (147,056)
Net income, 1994 -- 145,585 1,471 147,056
---------- ----------- ------- -----------
BALANCE AS OF DECEMBER 31, 1994 325,392.02 3,090,923 997 3,091,920
Corpus contributed 20,348.84 193,314 -- 193,314
Organizational and offering costs (1,305.68) (12,404) -- (12,404)
Dividends -- (315,213) (3,184) (318,397)
Net income, 1995 -- 315,213 3,184 318,397
---------- ----------- ------- -----------
BALANCE AS OF DECEMBER 31, 1995 344,435.18 3,271,833 997 3,272,830
Organizational and offering costs (592.11) (5,625) -- (5,625)
Dividends -- (160,420) (1,271) (161,691)
Net income, four months ended April 30,
1996 (unaudited) -- 125,799 1,271 127,070
---------- ----------- ------- -----------
BALANCE AS OF APRIL 30, 1996
(unaudited) 343,843.07 $ 3,231,587 $ 997 $ 3,232,584
========== =========== ======= ===========
</TABLE>
See accompanying notes to financial statements.
94 F-19
<PAGE> 99
CAPITAL ALLIANCE INCOME TRUST I
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 83,722 $ 147,056 $ 318,397
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization 560 560 560
(Increase) decrease in restricted cash -- (19,542) 922
Increase in accounts receivable (5,333) (6,753) (35,516)
Increase in allowance for bad debts -- -- 12,000
Increase (decrease) in mortgage note holdback -- 19,555 (875)
Increase (decrease) in due to affiliates 26,892 7,167 (7,632)
Increase (decrease) in other liabilities (14,333) (250) 6,425
--------- ----------- -----------
Net cash provided by operating activities 91,508 147,793 294,281
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in investments -- -- (100,000)
Investments in mortgage loans (434,500) (1,569,985) (1,510,656)
Repayments of mortgage loans 338,000 301,000 447,426
--------- ----------- -----------
Net cash used in investing activities (96,500) (1,268,985) (1,163,230)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of class "A" shares 388,576 2,201,767 193,314
Increase in subscriptions receivable -- -- (62,500)
Organizational and offering costs (26,424) (152,083) (12,404)
Dividends paid (83,722) (147,056) (318,397)
--------- ----------- -----------
Net cash provided by (used in) financing activities 278,430 1,902,628 (199,987)
--------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 273,438 781,436 (1,068,936)
CASH AT BEGINNING OF YEAR 166,091 439,529 1,220,965
--------- ----------- -----------
CASH AT END OF YEAR $ 439,529 $ 1,220,965 $ 152,029
========= =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ 45,304 $ --
</TABLE>
See accompanying notes to financial statements.
95 F-20
<PAGE> 100
CAPITAL ALLIANCE INCOME TRUST I
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Four Months Ended
April 30,
--------------------
1995 1996
---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 85,822 $127,070
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization -- 187
Increase in restricted cash (7,524) (95,323)
Increase in accounts receivable (12,562) (24,942)
Increase in allowance for bad debts 8,000 14,000
Increase in mortgage note holdback 7,525 95,322
Increase (decrease) in due to affiliates (31,766) 19,507
Increase in other liabilities -- 5,360
---------- --------
Net cash provided by operating activities 49,495 141,181
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in mortgage loans (867,255) (341,500)
Repayments of mortgage loans 102,528 631,143
---------- --------
Net cash provided by (used in) investing activities (764,727) 289,643
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of class "A" shares 32,153 --
Decrease in subscriptions receivable -- 62,500
Organizational and offering costs (1,088) (5,625)
Dividends paid (101,812) (161,691)
---------- --------
Net cash used in financing activities (70,747) (104,816)
---------- --------
NET INCREASE (DECREASE) IN CASH (785,979) 326,008
CASH AT BEGINNING OF YEAR 1,220,965 152,029
---------- --------
CASH AT END OF YEAR $ 434,986 $478,037
========== ========
</TABLE>
See accompanying notes to financial statements.
96 F-21
<PAGE> 101
CAPITAL ALLIANCE INCOME TRUST I
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1995 and 1996 (Unaudited)
and the three-year period ended December 31, 1995 (Audited)
1. Organization
Capital Alliance Income Trust I (the "Trust") was formed February 3, 1993,
as a Delaware statutory business trust, for the purpose of investing in home
equity loans secured by deeds of trust on one-to-four unit residential
properties.
The manager to the Trust, Capital Alliance Advisors, Inc. (the "Manager"),
originates, services and sells the Trust's loans. The Trustees of the Trust
are Calliance, Inc., a Delaware corporation (owned by the Manager), Thomas
B. Swartz, Dennis R. Konczal, and Douglas A. Thompson.
The Trust was formed as a result of the reorganization of Capital Alliance
Managed Income Fund, L. P. (the "Fund"), a California limited partnership.
Under the plan of reorganization, dated March 9, 1993, and approved by a
majority of the limited partners of the Fund, all assets and liabilities of
the Fund were transferred to the Trust in exchange for 71,515.2 class "A"
shares and one class "B" share of the Trust which were distributed in
liquidation of the Fund to the limited partners and the general partner of
the Fund, respectively.
The Trust's net profits and distributable cash flow are allocated 1% to the
class "B" shareholder and 99% to the class "A" shareholders until the class
"A" shareholders have received a non-cumulative, non-compounded return per
annum on their net capital contribution equal to the lesser of 13% of their
net capital contribution or the prime rate plus 450 base points. Thereafter,
net profits and distributable cash flow are allocated 50% to the class "B"
shareholder and 50% to the class "A" shareholders.
The Trust's net losses are allocated 1% to the class "B" shareholder and 99%
to the class "A" shareholders.
2. Summary of significant accounting policies
Cash and cash equivalents. Cash and cash equivalents include cash and liquid
investments with an original maturity of three months or less. The Trust
deposits cash in financial institutions insured by the Federal Deposit
Insurance Corporation. At times, the Trust's account balances may exceed the
insured limits.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Investment. The Trust records its investment in a related entity at cost.
This entity is a wholesale mortgage firm which originates and sells
residential mortgage loans secured by one-to-four unit residential
properties.
97 F-22
<PAGE> 102
CAPITAL ALLIANCE INCOME TRUST I
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1995 and 1996 (Unaudited)
and the three-year period ended December 31, 1995 (Audited)
2. Summary of significant accounting policies (continued)
Income Taxes. In accordance with federal and state income tax regulations,
income taxes are levied on the individual shareholders. Consequently, no
provision or liability for federal or state income taxes has been reflected
in the accompanying financial statements. The tax returns, the qualification
of the Trust as a flow-through entity for tax purposes, and the amount of
distributable income or loss are subject to examination by federal and state
taxing authorities. If such examination results in changes to the Trust's
qualification or in changes to distributable income or loss, the tax
liability of the shareholders could change.
Bad debt allowance. Management reviews its provision for bad debt
periodically and the Trust maintains an allowance for losses on mortgage
notes receivable at an amount that management believes is sufficient to
protect against losses in the loan portfolio. Accounts receivable deemed
uncollectible are written off or reserved.
Fair value of financial instruments. For cash and cash equivalents, the
carrying amount is a reasonable estimate of fair value. For mortgage note
receivables, fair value is estimated by discounting the future cash flows
using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
It was determined that the difference between the carrying amount and the
fair value of the mortgage notes receivable is immaterial.
Organizational and offering costs. Organization costs are capitalized and
amortized on a straight-line basis over five years. Organizational and
offering costs are recorded as a reduction of class "A" corpus and are
neither deductible nor amortizable.
Reclassifications. Certain 1994 and 1993 amounts have been reclassified to
conform with 1995 classifications.
3. Mortgage note holdback
Pursuant to mortgage loan agreements between the Trust and its borrowers, a
portion of the loan proceeds are held by the Trust until certain
improvements on the secured property are completed by the borrower. As of
December 31, 1994 and 1995 and April 30, 1996, mortgage note holdbacks from
the consummation of mortgage loans made amounted to $19,555, $18,680 and
$114,002, respectively.
4. Mortgage notes receivable
Mortgage notes receivable represent transactions with customers in which the
Trust has invested in home equity loans on residential real estate. The
Trust is subject to the risks inherent in finance lending including the
risk of borrower default and bankruptcy. A summary of the Trust's mortgage
notes receivable at April 30, 1996 is provided in Appendix A.
98 F-23
<PAGE> 103
CAPITAL ALLIANCE INCOME TRUST I
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1995 and 1996 (Unaudited)
and the three-year period ended December 31, 1995 (Audited)
4. Mortgage notes receivable (continued)
Mortgage notes receivable are stated at the principal outstanding. Interest
on the mortgages is due monthly and principal is due as a balloon payment at
loan maturity. The notes are secured by deeds of trust on residential
properties located primarily in California which results in a concentration
of credit risk. The value of the loan portfolio may be affected by changes
in the economy or other conditions of the geographical area.
5. Accounts receivable
Accounts receivable consists of accrued interest on mortgage notes
receivable and other amounts due from borrowers. Activity in the allowance
for bad debt on accounts receivable was as follows:
<TABLE>
<CAPTION>
December 31, April 30,
------------------------------- ------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ -- $ -- $ -- $ -- $12,000
Provision for bad debt -- -- 12,000 8,000 14,000
------ ------ ------- ------ -------
Balance, end of period $ -- $ -- $12,000 $8,000 $26,000
====== ====== ======= ====== =======
</TABLE>
6. Subscriptions receivable
As of December 31, 1995, shareholders owed the Trust $62,500 for capital
contributions to the Trust. Prior to the issuance of the Trust's December
31, 1995 audited financial statements, amounts outstanding as of December
31, 1995 were collected.
7. Gain on Sale of Foreclosed Assets
During 1994, the Trust foreclosed on two mortgage loans and the properties
were sold for a combined gain of $23,805. A property management fee of
$5,815 was paid to the Manager for its administrative services in the
foreclosure proceedings and sale of the properties.
8. Related Party Transactions
The Trustees and their affiliates hold class "A" and class "B" shares.
The Manager, which is owned by several of the Trustees and their affiliates,
has contracted with the Trust to provide loan administration and mortgage
origination services, and receives fees for these services from the Trust
and from borrowers. The Manager is also entitled to reimbursement for
clerical and administrative services. The Trust paid loan servicing fees of
$8,578, $17,676 and $31,095 during 1993, 1994 and 1995, respectively, to the
Manager. During the four months ended April 30, 1995 and 1996, the Trust
paid $10,328 and $10,866, respectively, to the Manager.
99 F-24
<PAGE> 104
CAPITAL ALLIANCE INCOME TRUST I
NOTES TO FINANCIAL STATEMENTS
For the four months ended April 30, 1995 and 1996 (Unaudited)
and the three-year period ended December 31, 1995 (Audited)
8. Related Party Transactions (continued)
The Trust also paid the Manager $0.20 per share for organizing the Trust and
marketing their securities. During 1993, 1994 and 1995, the Trust paid
$7,758, $44,173 and $4,773, respectively, to the Manager. For the four
months ended April 30, 1995 and 1996, the Trust paid $788 and $5,625,
respectively, to the Manager.
In addition, the Trust paid a sales commission of $0.50 per share to
participating broker/dealers, one of which is an affiliate of the Manager.
Total sales commissions paid to the affiliated broker/dealer was $20,369,
$40,835 and $7,631 during 1993, 1994 and 1995, respectively. For the four
months ended April 30, 1995 and 1996, total sales commissions paid to the
affiliated broker/dealer was $300 and $0, respectively. Most of the sales
commissions was reallowed to third party securities broker/dealers or
registered representatives.
100 F-25
<PAGE> 105
APPENDIX A
CAPITAL ALLIANCE INCOME TRUST I
MORTGAGE NOTES RECEIVABLE
(Unaudited)
The Trust's mortgage notes receivable all relate to conventional loans secured
by deeds of trust on single family residences. The following is a summary of the
Trust's mortgage notes receivable at April 30, 1996:
<TABLE>
<CAPTION>
Principal amount
of loans subject
Final Face Carrying to delinquent
maturity Periodic Prior amount of amount of principal or
Description Interest rate date payment terms liens mortgages mortgages interest
----------- ------------- -------- ------------- ----- --------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Individual loans greater than
$79,892 (3% of total mortgage
notes receivable of $2,663,072): 12.75% 03/01/96 $3,185 Second $300,000 $ 299,793 $299,793
12.50% 11/01/97 $2,281 Second $219,000 $ 219,000 $0
13.00% 04/01/97 $1,844 First $180,000 $ 170,200 $0
13.00% 11/01/97 $1,625 Second $150,000 $ 150,000 $0
13.00% 02/01/96 $1,463 First $135,000 $ 135,000 $0
12.50% 04/01/98 $1,298 First $124,600 $ 124,600 $0
13.50% 09/01/96 $1,271 Second $113,000 $ 113,000 $0
13.50% 04/01/96 $1,091 Second $ 97,000 $ 97,000 $ 97,000
14.00% 12/01/96 $1,108 First $ 95,000 $ 95,000 $0
12.50% 01/01/97 $ 948 First $ 91,000 $ 91,000 $0
14.00% 09/29/96 $1,050 First $ 90,000 $ 90,000 $0
13.50% 06/01/96 $ 942 Second $131,314 $ 83,745 $ 83,745
Loans from $50,000-$79,892 12.75% to 15.0% 6 to 60 months --- --- --- $ 685,837 $0
Loans from $20,000-$49,999 13.00% to 15.0% 12 to 60 months --- --- --- $ 308,897 $ 78,000
---------
Total Mortgage Notes Receivable at April 30, 1996 $2,663,072
==========
</TABLE>
101 F-26
<PAGE> 106
APPENDIX A
CAPITAL ALLIANCE INCOME TRUST I
RECONCILIATION OF MORTGAGE NOTES RECEIVABLE
<TABLE>
<CAPTION>
December 31, April 30,
------------------------------------------- --------------------------
1993 1994 1995 1995 1996
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $524,000 $ 620,500 $1,889,485 $1,889,485 $2,952,715
Additions during period:
New mortgage loans 434,500 1,569,985 1,510,656 867,255 341,500
Deductions during period:
Collections of principal 338,000 -- 447,426 102,528 631,143
Foreclosures -- 301,000 -- -- --
-------- ---------- ---------- ---------- ----------
Balance at close of period $620,500 $1,889,485 $2,952,175 $2,654,212 $2,663,072
======== ========== ========== ========== ==========
</TABLE>
102 F-27
<PAGE> 107
CAPITAL ALLIANCE INCOME TRUST II
FINANCIAL STATEMENTS
with
Independent Auditors' Report
For the Four Months Ended April 30, 1995 and 1996 (Unaudited),
the Period From October 18, 1994 (Inception)
to December 31, 1994 (Audited) and
the Year Ended December 31, 1995 (Audited)
103 F-28
<PAGE> 108
[NOVOGRADAC & COMPANY LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Capital Alliance Income Trust II:
We have audited the accompanying balance sheets of Capital Alliance Income Trust
II as of December 31, 1995 and 1994, and the related statements of income,
corpus and cash flows for the year ended December 31, 1995 and the period from
October 18, 1994 (inception) to December 31, 1994. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Alliance Income Trust
II as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the year ended December 31, 1995 and the period from October 18,
1994 (inception) to December 31, 1994, in conformity with generally accepted
accounting principles.
/s/ Novogradac & Company LLP
March 15, 1996
104 F-29
<PAGE> 109
CAPITAL ALLIANCE INCOME TRUST II
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, April 30,
-------------------
1994 1995 1996
---- ---- ----
ASSETS (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents $1,000 $ 677,949 $ 559,234
Restricted cash -- 75,602 72,325
Accounts receivable (net of bad debt allowance
of $6,000 in 1996) -- 21,646 34,437
Subscriptions receivable -- 203,011 --
Investments -- 100,000 100,000
Mortgage notes receivable -- 1,849,355 2,094,823
------ ---------- ----------
Total assets $1,000 $2,927,563 $2,860,819
====== ========== ==========
LIABILITIES AND CORPUS
Liabilities
Mortgage note holdback $ -- $ 75,602 $ 72,325
Due to affiliates -- 22,917 13,886
Other liabilities -- 11,844 3,257
------ ---------- ----------
Total liabilities -- 110,363 89,468
------ ---------- ----------
Corpus
Class "A" shares, $9.50 stated value, unlimited
shares of beneficial interest authorized,
297,496.95 and 293,094.26 shares issued and
outstanding at December 31, 1995 -- 2,815,240 2,770,351
and April 30, 1996, respectively
Class "B" shares, no par value, three shares of
beneficial interest authorized, one share issued
and outstanding at December 31, 1994 and 1995
and April 30, 1996, respectively 1,000 1,960 1,000
------ ---------- ----------
Total corpus 1,000 2,817,200 2,771,351
------ ---------- ----------
Total liabilities and corpus $1,000 $2,927,563 $2,860,819
====== ========== ==========
</TABLE>
See accompanying notes to financial statements.
105 F-30
<PAGE> 110
CAPITAL ALLIANCE INCOME TRUST II
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Four Months Ended
Years Ended December 31, April 30,
--------------------------------- ------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Interest income $ -- $ -- $107,667 $10,347 $102,912
Other income -- -- 4,333 8 16,255
------- ------- -------- ------- --------
Total revenues -- -- 112,000 10,355 119,167
------- ------- -------- ------- --------
EXPENSES
Loan servicing fees -- -- 12,070 -- 9,241
General and administrative -- -- 3,913 2,416 10,353
------- ------- -------- ------- --------
Total expenses -- -- 15,983 2,416 19,594
------- ------- -------- ------- --------
NET INCOME $ -- $ -- $ 96,017 $ 7,939 $ 99,573
======= ======= ======== ======= ========
</TABLE>
See accompanying notes to financial statements.
106 F-31
<PAGE> 111
CAPITAL ALLIANCE INCOME TRUST II
STATEMENTS OF CORPUS
<TABLE>
<CAPTION>
Class A Class B
---------------------- -------
Shares Amount Amount Total
------ ------ ------ -----
<S> <C> <C> <C> <C>
CORPUS CONTRIBUTED IN 1994 -- $ -- $ 1,000 $ 1,000
1995 ACTIVITY:
Corpus contributed 317,230.00 3,013,685 -- 3,013,685
Organizational and offering costs (19,733.05) (187,464) -- (187,464)
Dividends -- (106,038) -- (106,038)
Net income, 1995 -- 95,057 960 96,017
---------- ---------- ------- ----------
BALANCE AS OF DECEMBER 31, 1995 297,496.95 2,815,240 1,960 2,817,200
Redemption of class "A" shares (4,402.69) (44,825) -- (44,825)
Dividends -- (98,641) (1,956) (100,597)
Net income, four months ended
April 30, 1996 (unaudited) -- 98,577 996 99,573
---------- ---------- ------- ----------
BALANCE AS OF APRIL 30, 1996
(unaudited) 293,094.26 $2,770,351 $ 1,000 $2,771,351
========== ========== -====== ==========
</TABLE>
See accompanying notes to financial statements.
107 F-32
<PAGE> 112
CAPITAL ALLIANCE INCOME TRUST II
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ -- $ -- $ 96,017
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization -- -- --
Increase in accounts receivable -- -- (21,646)
Increase in due to affiliates -- -- 22,917
Increase in other liabilities -- -- 11,844
------- ------ -----------
Net cash provided by operating activities -- -- 109,132
------- ------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in investments -- -- (100,000)
Investments in mortgage loans -- -- (2,229,355)
Repayments of mortgage loans -- -- 380,000
------- ------ -----------
Net cash used in investing activities -- -- (1,949,355)
------- ------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of class "A" shares -- -- 3,013,685
Proceeds from sale of class "B" shares -- 1,000 --
Increase in subscriptions receivable -- -- (203,011)
Organizational and offering costs -- -- (187,464)
Dividends paid -- -- (106,038)
------- ------ -----------
Net cash provided by financing activities -- 1,000 2,517,172
------- ------ -----------
NET INCREASE IN CASH -- 1,000 676,949
CASH AT BEGINNING OF YEAR -- -- 1,000
------- ------ -----------
CASH AT END OF YEAR $ -- $1,000 $ 677,949
======= ====== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ -- $ --
</TABLE>
See accompanying notes to financial statements.
108 F-33
<PAGE> 113
CAPITAL ALLIANCE INCOME TRUST II
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Four Months Ended
April 30,
------------------
1995 1996
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,939 $ 99,573
Adjustments to reconcile net income to net cash provided
by operating activities:
Decrease in restricted cash -- 3,277
Increase in accounts receivable (5,576) (18,791)
Increase in allowance for bad debts -- 6,000
Decrease in mortgage note holdback -- (3,277)
Increase (decrease) in due to affiliates 3,015 (9,031)
Decrease in other liabilities -- (8,587)
--------- ---------
Net cash provided by operating activities 5,378 69,164
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in mortgage loans (417,000) (680,556)
Repayments of mortgage loans -- 435,088
--------- ---------
Net cash used in investing activities (417,000) (245,468)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of class "A" shares 576,192 --
Redemption of class "A" shares -- (44,825)
Decrease in subscriptions receivable -- 203,011
Organizational and offering costs (37,301) --
Dividends paid (3,425) (100,597)
--------- ---------
Net cash provided by financing activities 535,466 57,589
--------- ---------
NET INCREASE (DECREASE) IN CASH 123,844 (118,715)
CASH AT BEGINNING OF YEAR 1,000 677,949
--------- ---------
CASH AT END OF YEAR $ 124,844 $ 559,234
========= =========
</TABLE>
See accompanying notes to financial statements.
109 F-34
<PAGE> 114
CAPITAL ALLIANCE INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS
For the Four Months Ended April 30, 1995 and 1996 (Unaudited),
the Period From October 18, 1994 (Inception) to December 31, 1994 (Audited) and
the Year Ended December 31, 1995 (Audited)
1. Organization
Capital Alliance Income Trust II (the "Trust") was formed October 18, 1994,
as a Delaware statutory business trust, for the purpose of investing in home
equity loans secured by deeds to trust on one-to-four unit residential
properties.
The manager to the Trust, Capital Alliance Advisors, Inc. (the "Manager"),
originates, services and sells the Trust's loans. The Trustees of the Trust
are Calliance, Inc., a Delaware corporation (owned by the Manager), Thomas B.
Swartz, Dennis R. Konczal, and Douglas A. Thompson.
The Trust's net profits and distributable cash flow are allocated 1% to the
class "B" shareholder and 99% to the class "A" shareholders until the class
"A" shareholders have received a non-cumulative, non-compounded return per
annum on their net capital contribution equal to the lesser of 13% of their
net capital contribution or the prime rate plus 350 base points. Thereafter,
net profits and distributable cash flow are allocated 50% to the class "B"
shareholder and 50% to the class "A" shareholders.
The Trust's net losses are allocated 1% to the class "B" shareholder and 99%
to the class "A" shareholders.
2. Summary of significant accounting policies
Cash and cash equivalents. Cash and cash equivalents include cash and liquid
investments with an original maturity of three months or less. The Trust
deposits cash in financial institutions insured by the Federal Deposit
Insurance Corporation. At times, the Trust's account balances may exceed the
insured limits.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Investment. The Trust records its investment in a related entity at cost.
This entity is a wholesale mortgage firm which originates and sells
residential mortgage loans secured by one-to-four unit residential
properties.
Income Taxes. In accordance with federal and state income tax regulations,
income taxes are levied on the individual shareholders. Consequently, no
provision or liability for federal or state income taxes has been reflected
in the accompanying financial statements. The tax returns, the qualification
of the Trust as a flow-through entity for tax purposes, and the amount of
distributable income or loss are subject to examination by federal and state
taxing authorities. If such examination results in changes to the Trust's
qualification or in changes to distributable income or loss, the tax
liability of the shareholders could change.
110 F-35
<PAGE> 115
CAPITAL ALLIANCE INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS
For the Four Months Ended April 30, 1995 and 1996 (Unaudited),
the Period From October 18, 1994 (Inception) to December 31, 1994 (Audited) and
the Year Ended December 31, 1995 (Audited)
2. Summary of significant accounting policies (continued)
Bad debt allowance. Management reviews its provision for bad debt
periodically and the Trust maintains an allowance for losses on mortgage
notes receivable at an amount that management believes is sufficient to
protect against losses in the loan portfolio. Accounts receivable deemed
uncollectible are written off or reserved.
Fair value of financial instruments. For cash and cash equivalents, the
carrying amount is a reasonable estimate of fair value. For mortgage note
receivables, fair value is estimated by discounting the future cash flows
using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
It was determined that the difference between the carrying amount and the
fair value of the mortgage notes receivable is immaterial.
Organizational and offering costs. Organizational and offering costs are
recorded as a reduction of class "A" corpus and are neither deductible nor
amortizable.
3. Mortgage note holdback
Pursuant to mortgage loan agreements between the Trust and its borrowers, a
portion of the loan proceeds are held by the Trust until certain improvements
on the secured property are completed by the borrower. As of December 31,
1995 and April 30, 1996, mortgage note holdbacks from the consummation of
mortgage loans made amounted to $75,602 and $72,325, respectively.
4. Mortgage notes receivable
Mortgage notes receivable represent transactions with customers in which the
Trust has invested in home equity loans on residential real estate. The Trust
is subject to the risks inherent in finance lending including the risk of
borrower default and bankruptcy. A summary of the Trust's mortgage notes
receivable at April 30, 1996 is provided in Appendix A.
Mortgage notes receivable are stated at the principal outstanding. Interest
on the mortgages is due monthly and principal is due as a balloon payment at
loan maturity. The notes are secured by deeds of trust on residential
properties located primarily in California which results in a concentration
of credit risk. The value of the loan portfolio may be affected by changes in
the economy or other conditions of the geographical area.
111 F-36
<PAGE> 116
CAPITAL ALLIANCE INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS
For the Four Months Ended April 30, 1995 and 1996 (Unaudited),
the Period From October 18, 1994 (Inception) to December 31, 1994 (Audited) and
the Year Ended December 31, 1995 (Audited)
5. Accounts receivable
Accounts receivable consists of accrued interest on mortgage notes receivable
and other amounts due from borrowers. Activity in the allowance for bad debt
on accounts receivable was as follows:
<TABLE>
<CAPTION>
December 31, April 30,
---------------------------------------- -----------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ -- $ -- $ -- $ -- $ --
Provision for bad debt -- -- -- -- 6,000
--------- --------- --------- --------- ------
Balance, end of period $ -- $ -- $ -- $ -- $6,000
========= ========= ========= ========= ======
</TABLE>
6. Subscriptions receivable
As of December 31, 1995, shareholders owed the Trust $203,011 for capital
contributions to the Trust. Prior to the issuance of the Trust's December 31,
1995 audited financial statements, amounts outstanding as of December 31,
1995 were collected.
7. Related Party Transactions
The Manager, which is owned by several of the Trustees and their affiliates,
has contracted with the Trust to provide loan administration and mortgage
origination services, and receives fees for these services from the Trust and
from borrowers. The Manager is also entitled to reimbursement for clerical
and administrative services. During 1995 and for the four months ended April
30, 1995 and 1996, the Trust paid loan servicing fees of $12,070, $0 and
$9,241, respectively, to the Manager.
The Trust also pays the Manager $0.20 per share for organizing the Trust and
marketing their securities. During 1995 and for the four months ended April
30, 1995 and 1996, the Trust paid $60,779, $11,730 and $0, respectively, to
the Manager.
In addition, the Trust paid a sales commission of $0.50 per share to
participating broker/dealers, one of which is an affiliate of the Manager.
Total sales commissions paid to the affiliated broker/dealer was $126,685
during 1995. For the four months ended April 30, 1995 and 1996, total sales
commissions paid to the affiliated broker/dealer was $25,571 and $0,
respectively. Most of the sales commissions was reallowed to third party
securities broker/dealers or registered representatives.
112 F-37
<PAGE> 117
APPENDIX A
CAPITAL ALLIANCE INCOME TRUST II
MORTGAGE NOTES RECEIVABLE
(Unaudited)
The Trust's mortgage notes receivable all relate to conventional loans secured
by deeds of trust on single family residences. The following is a summary of the
Trust's mortgage notes receivable at April 30, 1996:
<TABLE>
<CAPTION>
Principal amount
Final Periodic Face Carrying of loans subject
Interest maturity Payment Prior amount of amount of to delinquent
Description rate date terms liens mortgages mortgages principal or
----------- -------- -------- -------- ----- --------- --------- interest
--------
<S> <C> <C> <C> <C> <C> <C> <C>
Individual loans greater than
$62,845 (3% of total mortgage
notes receivable of $2,094,823): 14.00% 04/01/98 $3,441 Second $295,000 $ 295,000 $0
13.75% 01/01/98 $2,658 First $232,000 $ 232,000 $0
13.00% 07/01/96 $1,820 First $168,000 $ 168,000 $0
12.50% 03/01/96 $1,406 First $135,000 $ 135,000 $135,000
13.00% 01/01/98 $1,213 First $112,000 $ 112,000 $0
12.75% 09/01/98 $1,063 First $100,000 $ 100,000 $0
14.00% 09/20/96 $ 980 First $ 84,000 $ 84,000 $0
13.00% 06/01/98 $ 796 Second $ 73,500 $ 73,452 $ 73,452
12.50% 08/01/97 $ 729 Second $ 70,000 $ 70,000 $0
15.00% 04/01/97 $ 875 First $ 70,000 $ 70,000 $0
15.00% 04/01/97 $ 875 First $ 70,000 $ 70,000 $0
15.00% 08/06/96 $ 849 First $ 67,900 $ 67,900 $0
Loans from $50,000-$62,845 13.25% to 15.0% 12 to 61 months --- --- --- $ 380,015 $0
Loans from $20,000-$49,999 12.75% to 16.0% 12 to 60 months --- --- --- $ 237,456 $ 72,000
----------
Total Mortgage Notes Receivable at April 30, 1996 $2,094,823
==========
</TABLE>
113 F-38
<PAGE> 118
APPENDIX A
CAPITAL ALLIANCE INCOME TRUST II
RECONCILIATION OF MORTGAGE NOTES RECEIVABLE
<TABLE>
<CAPTION>
December 31, April 30,
--------------------------------- ------------------------
1993 1994 1995 1995 1996
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ -- $ -- $ -- $ -- $1,849,355
Additions during period:
New mortgage loans -- -- 2,229,355 417,000 680,556
Deductions during period:
Collections of principal -- -- 380,000 -- 435,088
------ ------- ---------- -------- ----------
Balance at close of period $ -- $ -- $1,849,355 $417,000 $2,094,823
====== ======= ========== ======== ==========
</TABLE>
114 F-39
<PAGE> 119
- --------------------------------------------------------------------------------
HOW TO INVEST
- --------------------------------------------------------------------------------
FOR ANY ACCOUNT.
1. COMPLETE ALL ITEMS ON THE ORDER FROM. This includes the number of Shares
being ordered, their total price, the manner in which the Shares are
being ordered, their total price, the manner in which the Shares are to
be registered, the shareholder's social security or taxpayer
identification number and all selling agent information.
2. TAX IDENTIFICATION CERTIFICATION. You must provide your social security
number to avoid backup withholding. Under the provisions of Section
3406(a)(1)(C) of the Internal Revenue Code, payers are required to
withhold 20% from all taxable interest, dividend and certain other
payments on accounts which do not reflect a certified social security
number or tax identification number. This is referred to as "backup"
withholding. "Backup" withholding is not an additional tax or penalty.
Any amount withheld form your account may be used as a credit against
your federal income tax.
To certify that the tax identification number is correct and that you are
not subject to any withholding under Section 3406(a)(1)(C), you must
provide your name and address and sign and date the "Taxpayer
Identification Number" section of the order form.
3. Write a check or money order for the amount of the subscription, made
payable to "Golden Gate Bank, Escrow Agent" and send the Order Form and
check to:
Capital Alliance Income Trust
c/o Golden Gate Bank
344 Pine Street
San Francisco, CA 94104
4. If there are any questions regarding the Order Form, please contact your
representative or Brookstreet Securities Corporation's Corporate Finance
Department at (800) 268-2578 Ext. 104.
115
<PAGE> 120
CAPITAL ALLIANCE INCOME TRUST
ORDER FORM
For Office Use Only
------------------------------
SOCIAL SECURITY NO.
of investor whose name is printed
on the adjacent line
_ _ _ - _ _ - _ _ _ _
INVESTOR INFORMATION
Name(s) and addresses will be registered exactly as printed or typed below
Name(s) ----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
Address ----------------------------------------------------------------
City ----------------------------------- State ----- Zip -----------
Phone Number ----------------------- NY Residents see other side.
---------------------
or TAX IDENTIFICATION NUMBER
_ _- _ _ _ _ _ _ _
/ / U.S. Citizen
/ / U.S. Citizen residing outside the U.S.
/ / Resident alien citizen of ____________
/ / Non-Resident alien citizen of ________
Under the penalties of perjury, I certify that the information provided in this
section is true, correct and complete and that I am not subject to back-up
withholding under the provisions of Section 3406(a)(1)(C) of the Internal
Revenue Code.
X___________________ Date:__________ X_____________________ Date:__________
- --------------------------------------------------------------------------------
INVESTMENT: Check only one
1. / / INITIAL PURCHASE / / ADDITIONAL PURCHASE
2. TOTAL PURCHASE PRICE:
No. of Common Shares __________ x $10.00/ share = $____________
(Minimum $1,000)
3. / / Broker authorized to transfer funds directly from Undersigned's
Brokerage Account.
Please make check payable to Golden Gate Bank, Escrow Agent"
and send completed order Form and check to
Capital Alliance Income Trust
c/o Golden Gate Bank
344 Pine Street
San Francisco, CA 94104
- --------------------------------------------------------------------------------
FORM OF OWNERSHIP: Mark only one box.
/ / Individual
/ / Joint Tenants with Right
of Survivorship
/ / Community Property
/ / Tenants in Common
/ / Tenants by the Entirety
/ / Other _______________
/ / Custodian
/ / Estate
/ / Trust
/ / Corporation
/ / Custodian under UGMA, State of
--------------------------
or under UTMA, State of _____________
TAX EXEMPT PLANS: Orders for the following registrations
must be signed by the custodian/trustee
/ / IRA/SEP (Not for use with
Sierra's Prototype)
/ / Qualified Retirement Plan (Keogh)
/ / Pension/Profit Sharing Plan
/ / 401(K)
/ / Other _____________________
ADDITIONAL MAILING ADDRESS: If you are investing through a Trust Company and
want duplicate copies of investor mailings sent to you, please fill in below.
Name(s) ---------------------------------------------
---------------------------------------------
Address ---------------------------------------------
---------------------------------------------
City ----------------- State ----- Zip -----------
OPTIONAL CHECK ADDRESS: If you would like your distribution check mailed to an
address other than shown above, please complete this section.
Payee -----------------------------------------------
Acct. No. -------------------------------------------
Address ---------------------------------------------
- -----------------------------------------------------
City ----------------- State ----- Zip --------------
- --------------------------------------------------------------------------------
/ / DIVIDEND PAYMENT OPTION: Check this box if dividends are to be paid in cash.
Otherwise, Dividends will be reinvested automatically in additional Shares
pursuant to the Dividend Reinvestment Plan.
- --------------------------------------------------------------------------------
BROKER/DEALER INFORMATION: The Registered Representative must sign below to
complete order.
Broker/Dealer Firm -------------------------------------------------------
Registered Representative ----------------------------------------------------
Representative Address -------------------------------------------------------
City --------------------------------------------- State ----- Zip -----------
Phone Number -----------------------
X -------------------------------------------------------------------
Representative's Signature (Order cannot be accepted without signature.)
<PAGE> 121
THE FOLLOWING TEXT APPEARS ON THE REVERSE SIDE OF ORDER FORM
- --------------------------------------------------------------------------------
SPECIAL NEW YORK REQUIREMENTS
- --------------------------------------------------------------------------------
Each purchaser of Shares in New York must sign the following statement:
I hereby certify that I have either (i) a minimum annual gross income
of $35,000 and a net worth at fair market value of at least $25,000 (exclusive
of equity in home, home furnishings and personal automobiles), or (ii) a net
worth of $100,000 (similarly defined). I understand that the minimum investment
in the State of New York will be 250 Shares ($2,500) (100 Shares ($1,000) for
IRA Investments).
- ---------------------------------- ------------------------------
Signature of Investor(s)
117
<PAGE> 122
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 30. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
Amount
To Be
Paid
----
<S> <C>
SEC registration fee.................................$ 6,000.00
NASD filing fee ...................................... 2,240.00
NASDAQ-NMS Listing fee ...............................12,500.00
Printing and engraving expenses ......................
Legal fees and expenses ..............................60,000.00
Accounting fees and expenses .........................10,000.00
Blue Sky fees and expenses ........................... NONE
Transfer agent and custodian fees .................... 5,000.00
Miscellaneous ........................................25,000.00
</TABLE>
Item 31. Sales to Special Parties
Not Applicable
Item 32. Recent Sales of Unregistered Securities
From October 31, 1991 through December 31, 1995, Capital Alliance
Income Trust I, ("CAIT I"), a Delaware business trust and a predecessor to the
Trust, issued 344,435 Class "A" Shares in return for capital contributions
totaling $ 3,444,350 and one Class "B" share for a capital contribution of
$1,000.
From December 1, 1994 through December 31, 1995, Capital Alliance
Income Trust II, ("CAIT II"), a Delaware business trust and a predecessor to the
Trust, issued 297,497 Class "A" Shares in return for capital contributions
totaling $ 2,974,970 and one Class "B" share for a capital contribution of
$1,000.
The aforementioned transactions are exempt from registration under
Section 4(2) of the Securities Act of 1933 and Regulation D issued thereunder as
transactions not involving a public offering.
On April 30, 1996 the Trust issued 643,730 Series "A" Preferred Shares
to the Class "A" and Class "B" shareholders of CAIT I and CAIT II in exchange
for all of the unissued and outstanding Class "A" and Class "B" shares of CAIT I
and CAIT II pursuant to an Agreement and Plan of Reorganization and
Consolidation which was consummated pursuant to a Permit of the Commissioner of
Corporations of the State of California after a hearing on the fairness of the
terms of said transaction pursuant to Sections 25142 of the California
Corporations Code.
The aforesaid transaction was exempt from registration under Section
3(a)(10) of the Securities Act of 1933.
Item 33. Indemnification of Directors and Officers and Agents
Section 145 of the Delaware General Corporation Law provides as follows:
Section 145. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND
AGENTS; INSURANCE
(a) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the
118
<PAGE> 123
corporation as a director, officer, employee or agent of another
corporation, partnership, or joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such actions suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was
unlawful.
(b) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the
fact that he is or was aq director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or
the court in which such action or suit was brought shall determine upon
application, that despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent
of a corporation has been successful on the merits or otherwise n
defense of any action, suit or proceeding referred to in subsections
(a) and (b), or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) (unless
ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b). Such determination shall be made (1) by a
majority vote of the directors who are not parties to such action, suit
or proceeding, even though less than a quorum, or (2) if there are no
directors, or if such directors so direct, by independent legal counsel
in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an
officer or directory in defending any civil, criminal, administrative,
or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation
as authorized in this Section. Such expenses (including attorneys'
fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems
appropriate.
(f) The indemnification and advancement of expenses provided
by, or granted pursuant to, the other subsections of this section shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any
by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action
in another capacity while holding such office.
(g) A corporation shall power to purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by
im in any such capacity, or arising out of his status as such, whether
or not the corporation would have the power to indemnify him against
such liability under the provisions of this section.
119
<PAGE> 124
(h) For purposes of this section, reference to "the
corporation" shall include, in addition tot eh resulting corporation,
any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its
separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any
person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such
constituent as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Section
with respect to the resulting or surviving corporation as he would have
with respect to such constituent corporation if its separate existence
had continued.
(i) For purposes of this Section, references to "other
enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and reference to "serving at the
request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on,
or involves services by, such director, officer, employee, or agent
with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonable believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interest of the corporation" as
referred to in this Section.
(j) The indemnification and advancement of expenses provided
by, or granted pursuant to, this action shall, unless otherwise provide
when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive
jurisdiction to hear and determine all actions for advancement of
expenses or indemnification brought under this section or under any
bylaw. agreement, vote of stockholders or disinterested directors, or
otherwise. The Court of Chancery may summarily determine a
corporation's obligation to advance expenses (including attorneys'
fees). (As amended by Ch. 186, Laws of 1967, Ch. 421, Laws of 1970, Ch.
437, Laws of 1974, Ch. 25, Laws of 1981, Ch. 112, Laws of 1983, Ch.
289, Laws of 1986, Ch. 376, Laws of 1990, and Ch. 261, Laws of 1994.)
Article IX of the Certificate of Incorporation of the Trust provides as follows:
120
<PAGE> 125
ARTICLE IX
9.1 Indemnification of Officers and Directors. Each person who
was or is a party to, or is threatened to be made a party to, or is
otherwise involved in any action, suit, or proceeding, whether civil,
criminal, administrative, or investigative (a "proceeding"), by reason
of being or having been a director or officer of the Corporation, or of
any predecessor corporation, or being or having been a director or
officer serving at the request of the Corporation as a director,
officer, employee or other agent of another corporation, partnership,
joint venture, trust, or other enterprise (including service with
respect to corporation-sponsored employee benefit plans), whether the
basis of the proceeding is an alleged action or inaction in an official
capacity as a director or officer or in any other capacity while
serving as a director or officer, shall, subject to the terms of any
agreement between the Corporation and that person, be indemnified and
held harmless by the Corporation to the fullest extent permissible
under Delaware Law and this Certificate of Incorporation, against all
expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid in settlement)
actually and reasonably incurred or suffered by that person in
connection therewith, except that amounts shall be payable in
settlement of a proceeding only if the settlement is approved in
writing by the Corporation. This indemnification shall continue as to a
person who has ceased to be a director or officer for acts performed
while a director or officer, and shall inure to the benefit of his or
her heirs, executors and administrators. Notwithstanding the foregoing,
the Corporation shall indemnify any such person in connection with a
proceeding (or part thereof) initiated by that person only if the
proceeding (or part thereof) was authorized by the Board of Directors.
The right to indemnification conferred in this Article IX shall include
the right to be paid by the Corporation the expenses incurred in
defending and proceeding in advance of final disposition to the fullest
extent permitted by law, and such expenses shall be advanced by the
Corporation in advance of the final disposition of a proceeding upon
delivery to the Corporation of a written request for such payment and
of an undertaking by, or on behalf of, the director or officer to repay
all amounts so advanced if it shall be ultimately determined that the
director or officer is not entitled to be indemnified.
Notwithstanding the foregoing or any other provisions under
this Article IX, the Corporation shall not be liable under this Article
IX to indemnify a director or officer against expenses, liabilities or
losses incurred or suffered in connection with, or to make any advances
with respect to, any proceeding against and director or officer: (a) as
to which the Corporation is prohibited by applicable law from paying an
indemnity; (b) with respect to expenses of defense or investigation, if
the expenses were or are incurred without the Corporation's consent
(which consent may not be unreasonably withheld); (c) for which final
payment is actually made to the director or officer under an insurance
policy maintained by the Corporation, except in respect of any excess
beyond the amount of payment under the policy; (d) for which payment is
actually made to the director or officer under an indemnity by the
Corporation otherwise than pursuant to this Article IX, except in
respect of any excess beyond the amount of payment under that
indemnity; (e) based upon or attributable to the director or officer
gaining in fact any personal profit or advantage to which not legally
entitled; (f) for an accounting of profits made from the purchase or
sale by the director or officer of securities of the Corporation
pursuant to the provisions of Section 16(b) of the Securities Exchange
Act of 1934 and amendments thereto or similar provisions of any
federal, state or local statutory law; or (g) based upon acts or
omissions involving intentional misconduct or a knowing and culpable
violation of law.
9.2 Indemnification of Employees and Agents. A person who was
or is a party or is threatened to be made a party or is otherwise
involved in any proceeding by reason of being or having been an
employee or agent of the Corporation or being or having been an
employee serving at the request of the Corporation as an employee or
agent of another enterprise (including service with respect to
corporation-sponsored employee benefit plans), whether the basis of the
proceeding is an alleged action or inaction in an official capacity or
in any other capacity while serving as an employee or agent, may, upon
appropriate action by the Corporation and subject to the terms of any
agreement between the Corporation and that person, be indemnified and
held harmless by the Corporation to the fullest extent permissible
under Delaware Law and this Certificate of Incorporation, against all
expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid in settlement)
actually and reasonably incurred or suffered by that person in
connection therewith.
9.3 Right of Directors and Officers to Bring Suit. If a claim
under Section 9.1 is not paid by the Corporation or on its behalf
within 90 days after a written claim has been received by the
Corporation, the claimant
121
<PAGE> 126
may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim, and, if successful in whole or
in part, the claimant also shall be entitled to be paid the expense of
prosecuting the claim.
9.4 Successful Defense. Notwithstanding any other provision of
this Article IX, to the extent that a director or officer has been
successful on the merits or otherwise (including the dismissal of a
proceeding without prejudice or the settlement with the written consent
of the Corporation of a proceeding without admission of liability), in
defense of any proceeding referred to in Section 9.1 or in defense of
any claim, issue or matter therein, that director or officer shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred in connection therewith.
9.5 Indemnity Agreements. The Corporation may enter into
agreements with any director, officer, employee or agent of the
Corporation providing for indemnification to the fullest extent
permissible under applicable law and this Certificate of Incorporation.
9.6 Limitation of Liability. A Director of the Corporation
shall not be personally liable to the Corporation or its Shareholders
for monetary damages for breach of fiduciary duty as a Director, except
for liability (a) for any breach of the Director's duty of loyalty to
the Corporation or its Shareholders, (b) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the Delaware General
Corporation Law, or (d) for any transaction from which the Director
derived an improper personal benefit.
9.7 Subrogation. In the event of payment by the Corporation of
a claim under Section 9.1 or 9.2 of this Article IX, the Corporation
shall be subrogated to the fullest extent of such payment to all of the
rights of recovery of the indemnified person, who shall execute all
papers required and shall do everything that may be necessary or
appropriate to secure such rights, including the execution of such
documents necessary or appropriate to enable the Corporation
effectively to bring suit to enforce such rights.
9.8 Non-Exclusivity of Rights. The right to indemnification
provided by this Article IX shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute,
bylaw, agreement, vote of shareholders or disinterested directors, or
otherwise.
9.9 Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent
of the Corporation or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss,
whether or not the Corporation would have the power to indemnify that
person against such expense, liability or loss under Delaware law.
9.10 Expenses as a Witness. To the extent that any director,
officer or employee of the Corporation is, by reason of that position,
a witness in any action, suit or proceeding, he or she will be
indemnified against all costs and expenses actually and reasonably
incurred by him or her or on his or her behalf in connection therewith.
9.11 Non-Applicability to Fiduciaries of Employee Benefit
Plans. This Article IX does not apply to any proceeding against any
trustee, investment manager or other fiduciary of an employee benefit
plan in that person's capacity as such, even though that person may
also be an agent of the Corporation. The Corporation shall have the
power to indemnify that trustee, investment manager, or other fiduciary
to the extent permitted by Delaware Corporation Law Section 102.
9.12 Separability. Each and every paragraph, sentence, term
and provision of this Article IX is separate and distinct, so that if
any paragraph, term or provision shall be held to be invalid or
unenforceable for any reason, its invalidity or unenforceability shall
not affect the validity or enforceability of any other paragraph,
sentence, term or provision of this Article IX. To the extent required,
any paragraph, sentence, term or provision of this Article IX may be
modified by a court of competent jurisdiction to preserve its validity
and to provide the claimant with, subject to the limitations set forth
in this Article IX and any agreement between the Corporation and the
claimant, the broadest possible indemnification permitted under
applicable law.
122
<PAGE> 127
In addition, the Registrant has entered into Indemnity Agreements
(Exhibit 10.2 hereto) with its officers and Directors. The Underwriting
Agreement (Exhibit 1.1) also provides for indemnification by the Underwriters of
the Trust, its Directors and officers and persons who control the Trust within
the meaning of Section 15 of the Securities Act with respect to certain
liabilities, including liabilities arising under the Securities Act.
Item 34. Treatment of Proceeds From Stock Being Registered
Not Applicable
Item 35. Financial Statements and Exhibits
(a) Financial Statements included in the Prospectus are:
1. Pro-Forma Combined Financial Statement of Capital
Alliance Income Trust, A Real Estate Investment Trust
with Independent Auditor's Report as of December 31,
1994, December 31, 1995 and April 30, 1996.
All schedules have been omitted because they are either not applicable,
not required or the information required has been disclosed in the financial
statements and related notes or otherwise in the Prospectus.
(b) Exhibits
Exhibit
No.
---
1.1 Form of Managing Dealer Agreement (including form of Selected
Dealer Agreement).
3.1 Charter Certificate of Incorporation and Amendment No. 1.
3.2 Bylaws of the Registrant.
*4.1 Form of Stock Certificate of Common Shares of the Registrant.
4.2 Form of Shareholder's Warrant Agreement
4.3 Form of Underwriter's Warrant Agreement
*4.4 Form of Common Warrant Certificate
*5.1 Opinion of Wilson, Ryan & Campilongo
*8.1 Opinion of Wilson, Ryan & Campilongo
10.1 Form of Management Agreement between the Registrant and Capital
Alliance Advisors, Inc.
10.2 Form of Indemnity Agreement between the Registrant and its
Directors and Officers.
10.3 Form of Loan Origination and Loan Servicing Agreement between the
Registrant and Capital Alliance Advisors, Inc.
10.4 Form of Dividend Reinvestment Plan.
23.1 Consent of Wilson, Ryan & Campilongo (contained in Exhibit 5.1).
23.2 Consent of Novogradac & Company LLP.
24.1 Power of Attorney of Thomas B. Swartz
24.2 Power of Attorney of Dennis R. Konczal
24.3 Power of Attorney of Douglas A. Thompson
*24.4 Power of Attorney of Stanley C. Brooks
*24.5 Power of Attorney of Harvey Blomberg
24.6 Power of Attorney of Jeannette Hagey
27.1 Financial Data Schedule -- Capital Alliance Income Trust I
27.2 Financial Data Schedule -- Capital Alliance Income Trust II
27.3 Financial Data Schedule -- Capital Alliance Income Trust, A Real
Estate Investment Trust
28.1 Impound and Escrow Agreement
* To be filed by amendment.
Item 36. Undertakings
The undersigned Registrant hereby undertakes to provide to the Managing
Dealer at the closing specified in the Managing Dealer Agreement certificates,
if any, in such denominations and registered in such names as required by the
Managing Dealer to permit prompt delivery to each purchaser.
123
<PAGE> 128
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Description Page
--- ----------- ----
<S> <C>
1.1 Form of Underwriting Agreement........................................................................128
3.1 Charter Certificate of Incorporation and Amendment No. 1 .............................................144
3.2 Bylaws of the Registrant..............................................................................153
*4.1 Form of Stock Certificate of Common Shares of the Company............................................. --
4.2 Form of Shareholder's Warrant Agreement...............................................................174
4.3 Form of Underwriter's Warrant Agreement...............................................................187
*4.4 Form of Common Warrant Certificate.................................................................... --
*5.1 Opinion of Wilson, Ryan & Campilongo.................................................................. --
*8.1 Opinion of Wilson, Ryan & Campilongo.................................................................. --
10.1 Form of Management Agreement between the Registrant and Capital Alliance Advisors, Inc................200
10.2 Form of Indemnity Agreement between the Registrant and its Directors and Officers.....................210
10.3 Form of Loan Origination and Loan Servicing Agreement between the Registrant and
Capital Alliance Advisors, Inc........................................................................216
10.4 Form of Dividend Reinvestment Plan....................................................................222
23.1 Consent of Wilson, Ryan & Campilongo..................................................................223
23.2 Consent of Novogradac & Company LLP...................................................................224
24.1 Power of Attorney of Thomas B. Swartz.................................................................225
24.2 Power of Attorney of Dennis R. Konczal................................................................226
24.3 Power of Attorney of Douglas A. Thompson..............................................................227
*24.4 Power of Attorney of Stanley C. Brooks................................................................228
*24.5 Power of Attorney of Harvey Blomberg..................................................................229
24.6 Power of Attorney of Jeannette Hagey..................................................................230
27.1 Financial Data Schedule -- Capital Alliance Income Trust I............................................232
27.2 Financial Data Schedule -- Capital Alliance Income Trust II...........................................233
27.3 Financial Data Schedule -- Capital Alliance Income Trust, a Real Estate Investment Trust..............234
28.1 Impound and Escrow Agreement..........................................................................235
* To be filed by amendment.
</TABLE>
<PAGE> 1
EXHIBIT 1.1
MANAGING DEALER AGREEMENT
__________________, 1996
BROOKSTREET SECURITIES CORPORATION
2316 Campus Drive
Suite 210
Irvine, California 92715
Ladies/Gentlemen:
Capital Alliance Income Trust, A Real Estate Investment Trust, a
Delaware corporation (the "Company"), desires to increase the capital of the
Company in the maximum amount of $15,000,000 by the sale of (a) 1,500,000 shares
of Common Stock, $0.01 par value per share, of the Company ("Shares") and up to
150,000 detachable Warrants ("Shareholder Warrant") to purchase an additional
share of Common Stock (a "Shareholder Warrant Share") at an exercise price of
$7.00 per share to be issued in the ratio of one Shareholder Warrant for each
ten Shares purchased. The Company will additionally issue a maximum of up to
150,000 Managing Dealer's Warrants to purchase one share of Common Stock
("Managing Dealer Warrant Share") at an exercise price of $9.00 per Share, to
the Managing Dealer or its assignees ("Managing Dealer Warrants") in the ratio
of one Managing Dealer Warrant for each ten Shares sold. The Shares and
Shareholder Warrants are hereinafter sometimes referred to collectively as the
"Securities." The purchasers therefor, each of whom will execute an order form
substantially similar to the form attached as an exhibit to the Prospectus
hereinafter referred to (the "Order"), and by which all such purchasers will be
bound, will become security holders ("Security holders") of the Company.
SECTION 1. Representations and Warranties of the Company.
(a) The Company represents, warrants, and agrees with you for your
benefit that:
(i) The Company has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-11 (No.
_______) for the registration of the Securities under the Securities Act of
1933, as amended (the "Act"), and will file such amendments thereto as may be
required. The Company will not, at any time after the date hereof and before the
Registration Statement becomes effective, file any other amendment to the
Registration Statement or any other amended prospectus to which you shall
object. The Registration Statement as amended and the prospectus on file with
the Commission at the time the Registration Statement becomes effective are
hereinafter called the "Registration Statement" and the "Prospectus",
respectively, except that (1) if the Company files a post-effective amendment to
the Registration Statement then the term "Registration Statement" shall, from
and after the declaration of the effectiveness of such post-effective amendment,
refer to the Registration Statement as amended by such post-effective amendment
thereto, and the term "Prospectus" shall refer to the amended prospectus then on
file with the Commission and (2) if the Company files a prospectus pursuant to
Rule 424(b) of the rules and regulations of the Commission under the Act (the
"Regulations") that shall differ from the prospectus on file at the time the
Registration Statement or any post-effective amendment thereto shall have become
effective, the term "Prospectus" shall refer to the prospectus filed pursuant to
Rule 424(b) from and after the date on which it shall have been filed. The
Company will not at any time after the Registration Statement initially becomes
effective file any amendment to the Registration Statement or any amendment or
supplement to the Prospectus without your prior consent or to which you shall
object.
(ii) Upon payment of the consideration therefor specified in
the Order, the Shares, and upon exercise of the Warrants by the holders thereof,
Shareholder's Warrant and the Warrant Shares, will constitute valid Shares of
the Company duly issued, fully paid and nonassessable.
128
<PAGE> 2
(iii) The Company is duly organized and validly existing as a
corporation under the laws of the State of Delaware with full power and
authority to invest in, acquire, hold, maintain, sell, transfer and otherwise
use the mortgage loans referred to or to be referred to in the Prospectus (the
"Mortgages"), or to own and manage its interest in any partnership or joint
venture holding title to particular Mortgages and to conduct the business in
which it is engaged or proposes to engage as described in the Prospectus. The
Company is duly qualified and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties or the
character of its operations require such qualification.
(iv) At the time the Registration Statement initially becomes
effective and at the time that any post-effective amendment thereto becomes
effective, the Registration Statement and the Prospectus, and at the Initial
Closing Date and each Subsequent Closing Date, if any, referred to below, the
Prospectus, will comply with the provisions of the Act and the Regulations; at
the time the Registration Statement initially becomes effective and at the time
that any post-effective amendment thereto becomes effective, the Registration
Statement will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement initially
becomes effective and at the time that any post-effective amendment thereto
becomes effective; and at each Closing Date, including the Initial Closing Date,
the Prospectus will not contain an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this paragraph
shall not apply to statements in or omissions from the Registration Statement or
the Prospectus made in reliance upon and in conformity with written information
furnished to the Company by you expressly for use in the Registration Statement
or the Prospectus.
(v) The accountants who certified the financial statements
filed with the Commission as part of the Registration Statement are, with
respect to the Company, independent public accountants as required by the Act
and the Regulations.
(vi) The financial statements filed as a part of the
Registration Statement and those included in the Prospectus present fairly the
financial position of the Company as at the dates indicated; and said financial
statements have been prepared in conformity with generally accepted accounting
principles (as described therein).
(vii) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, except as may otherwise be
stated in or contemplated by the Registration Statement and Prospectus: (A)
there has not been any material adverse change in the condition, financial or
otherwise, of the Company, or any of the Mortgages, or in the earnings, affairs
or business prospects of the Company, whether or not arising in the ordinary
course of business, and (B) there have not been any material transactions
entered into by the Company, or relating to any of the Mortgages, other than
those in the ordinary course of business.
(viii) This Managing Dealer Agreement has been duly and
validly authorized, executed and delivered by or on behalf of the Company and
constitutes the valid, binding and enforceable agreement of the Company.
(ix) The execution and delivery of this Managing Dealer
Agreement and the incurrence of the obligations herein and therein set forth and
the consummation of the transactions contemplated herein and therein and in the
Prospectus will not constitute a breach of, or default under, any instrument by
which the Company or any of the Mortgages is bound or, to the best of its
knowledge, information and belief, any order, rule or regulation applicable to
the Company or the Mortgages or of any court or any governmental body or
administrative agency having jurisdiction over the Company or any of the
Mortgages.
(x) The Company has good and marketable title to the Mortgages
and other investments owned by it.
(xi) To the best of its knowledge, information and belief,
there is not pending, threatened or contemplated any action, suit or proceeding
before or by any court or other governmental body to which the Company is or may
be a party, or to which any of the Mortgages, or any property or assets of the
Company is or may be subject which is not referred to in the Prospectus and
which might result in any material adverse change in the condition (financial or
otherwise), business or
129
<PAGE> 3
prospects of the Company or might materially adversely affect any of the
Mortgages or other properties or assets of the Company.
(xii) Neither the Company nor any affiliate thereof, has
received, or is entitled to receive, directly or indirectly, any commission,
finder's fee or similar fee from any person other than as described in the
Prospectus in connection with the acquisition, or the commitment for the
acquisition of the Mortgages by the Company.
(xiii) On the date hereof, and at all times through the
Offering Termination Date, referred to below, the Company is not and shall not
be an investment company as that term is defined in the Investment Company Act
of 1940, as amended.
(xiv) Neither the Company nor any affiliate thereof shall give
any information or make any representation in connection with the offering other
than those contained in the Prospectus or such other material as may be provided
or approved by you.
(b) Any certificate signed by the Company and delivered to you for the
purposes of this Agreement shall be deemed a representation and warranty by the
Company to you as to the matters covered thereby.
SECTION 2. Offering and Sale of Securities.
(a) On the basis of the representations, warranties and covenants
herein contained, but subject to the terms and conditions herein set forth, you
are hereby appointed the agent of the Company during the term herein specified
(the "Offering Period") for the purpose of finding purchasers for the Securities
for the account and risk of the Company through a public offering, and subject
to the performance by the Company of all of its obligations to be performed
hereunder and to the completeness and accuracy of all the representations and
warranties contained herein, you hereby accept such agency and agree on the
terms and conditions herein set forth to use your best efforts during the
Offering Period to find purchasers for the Securities at a public offering price
of (i) $10.00 for each Share. Except as provided in Section 2(f) hereof, your
agency hereunder, which is coupled with an interest and, therefore, is not
terminable by the Company without your permission, shall continue until the
close of business on such date not later than 24 months following the effective
date of the Offering unless extended by the Company with your consent. The
offering may be terminated at any time by the Company and you (the close of
business of such date being hereinafter referred to as the "Offering Termination
Date").
(b) An Order must be completed by or on behalf of each person desiring
to purchase Securities in the form attached to the Prospectus, and you shall
provide such other information the Company deems reasonably necessary, and all
documents, if any, required under state securities laws. You shall ascertain
that each Order sent in by or on behalf of a prospective purchaser of Securities
has been properly completed and executed. You shall return the Order together
with the customer's check or your check or funds transfer (in the amount or
amounts required by paragraph (a) above) payable to "Golden Gate Bank as Escrow
Agent - Capital Alliance Income Trust", c/o Golden Gate Bank, 344 Pine Street,
San Francisco, California, 94104 (the "Escrow Holder"). In the case of on-site
supervisory review, your check must be transmitted to the Escrow Holder by the
end of the next business day following receipt of the purchaser's check and, in
the case of off-site supervisory review, the subscriber's check must be
transmitted to your final review office by the end of the next business day
following receipt thereof. Following receipt of the purchaser's check by your
final review office, your check must be transmitted to the Escrow Holder by the
end of the next business day. Upon receipt of an Order and a check, the Escrow
Holder will forward the original Order to the Company.
You will comply with the requirements of Rule 15c2-4 of the
Securities Exchange Act of 1934, as amended.
(c) You represent that you are aware of your responsibilities under the
Rules of the National Association of Securities Dealers, Inc. (the "NASD").
(d) Prior to the Initial Closing Date (as hereinafter defined), the
Company will have no right to obtain such funds from the Escrow Holder. The
right of the Company to receive such funds on the Initial Closing Date is
subject to fulfillment of the conditions specified in Section 6 hereof.
130
<PAGE> 4
(e) "Minimum Offering" as used herein shall mean that there shall have
occurred, no later than twelve (12) months from the effective date of the
Offering (unless extended by the Trust) (the "Minimum Offering Date") the sale
of at least $500,000, or the minimum dollar level of Shares approved by the
NASD, of Shares, which shall be evidenced by notification to you in writing by
the Company and the Escrow Holder that Orders and payments for at least $500,000
(or the proceeds of such minimum level) of Shares shall have been received
pursuant to Section 2(b) above. The Initial Closing Date as used herein shall
mean the first full business day following the date on which the Minimum
Offering is achieved or such day thereafter as shall be mutually agreed upon by
you and the Company.
(f) In the event the offering is commenced and the Minimum Offering is
not achieved by the Minimum Offering Date, all funds received from prospective
purchasers (if any) shall be returned in full, with any interest actually earned
thereon and without deduction of any escrow or other fees and expenses; and your
agency and this Managing Dealer Agreement shall terminate without obligation on
your part or on the part of the Company, except as provided in Section 5 hereof
and except that the indemnification or contribution, as the case may be,
provided in Section 7 hereof shall continue after such termination of this
Managing Dealer Agreement.
(g) Subject to fulfillment of the conditions specified in Section 6
hereof, at the Initial Closing Date payment of the purchase price for the
Securities for which you have found purchasers as of said Initial Closing Date,
and delivery, with respect to each purchaser, of a copy of the Order signed by
such purchaser, shall be made to the Company at the office of the Escrow Holder,
or at such other place as shall be agreed between you and the Company.
(h) If at least the Minimum Offering has been achieved but less than
all of the Securities have been purchased at the Initial Closing Date, the
Offering Period shall continue until the earlier to occur of the Offering
Termination Date or the date on which all Securities shall have purchased. At
all times during the Offering Period you shall follow the procedures prescribed
by Section 2(b) hereof. Securities will be issued at closing dates ("Subsequent
Closing Dates") occurring after the Initial Closing Date and prior to the
Offering Termination Date as agreed upon by you and the Company.
(i) As consideration for your services and undertakings herein, your
compensation will be paid to you as follows:
(i) If the Minimum Offering is achieved and all conditions
precedent hereunder to the obligations of you and the Company are satisfied on
the Initial Closing Date or any Subsequent Closing Date, as the case may be, you
will be paid a commission of six percent (6%) of the gross proceeds from the
sale of a Security (other than Shareholder and Managing Dealer Warrants and
Warrant Shares and Shares sold under the Dividend Reinvestment Plan) paid for at
the applicable Closing Date. Any other Selected Dealer (as defined below in
clause (j)) selling Securities shall be paid a commission as provided in
subparagraphs 2(i)(i) and (j).
(ii) At the Initial Closing Date and any Subsequent Closing
Date, you will be paid a Managing Dealer's non-accountable marketing fee equal
to one percent (1%) of the gross proceeds from the sale of Securities (other
than Shareholder and Managing Dealer Warrants and Warrant Shares), whether
arranged by you or a Selected Dealer.
(iii) At the final closing Date of the Offering, you or your
assignees will be issued Managing Dealer Warrants in the ratio of one Managing
Dealer Warrant for each 10 Shares sold in the Offering. The Managing Dealer
Warrants will be exercisable during the twenty-fifth through the forty-eighth
month following the effective date of the Offering pursuant to the Managing
Dealer's Warrant Agreement.
(j) Orders may be solicited by one or more dealers either affiliated
with you by reason of direct or indirect ownership or unaffiliated members of
the NASD (including Capital Alliance Investments, Inc.) (the "Selected Dealers")
and sales by Selected Dealers shall be made under a Selected Dealer Agreement
substantially in the form attached hereto as Exhibit A. Pursuant to any Selected
Dealer Agreements, you will reallow each Selected Dealer a concession of up to a
maximum of six percent (6%) of the gross proceeds of Securities sold with
respect to each Security sold by the Company pursuant to an Order solicited by
such Selected Dealer and may reallow a maximum of 100% of that portion of the
non-accountable allowance referred to in subparagraph (i)(iii) of this Section 2
that relates to sales of Securities solicited by such Selected Dealer, subject
to the terms of subparagraph (i) of this Section 2.
131
<PAGE> 5
(k) Neither you, the Company, nor any dealer participating in the
offering of the Securities shall, directly or indirectly, pay or award any
finder's fees, commissions or other compensation to any person engaged by a
potential investor for investment advice as an inducement to such advisor to the
purchase of Securities, provided, however, that normal sales commissions
referred to in the Prospectus payable to a registered broker-dealer or other
properly licensed person for selling Securities shall not be prohibited hereby.
(l) You agree that you will not disseminate or publish any
advertisement relating to your solicitation of subscribers for the Securities
(including, without limitation, any advertisement relating to seminars) (i) the
form of which has not been submitted to the NASD by the Company and (ii) that
has not been approved by the Company.
SECTION 3. Covenants of the Company.
The Company covenants with you as follows:
(a) It shall have notified you immediately and confirmed the notice in
writing (i) when the Registration Statement and any amendment thereto shall have
become effective, (ii) of the receipt of any comments from the Commission with
respect to the Registration Statement, (iii) of any request by the Commission
for any amendment to the Registration Statement or any amendment or supplement
to the Prospectus or for additional information relating thereto, and (iv) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of any proceedings for that purpose. The Company
will make every reasonable effort to prevent the issuance by the Commission of
any stop order and, if any such stop order shall at any time be issued, to
obtain the lifting thereof at the earliest possible moment.
(b) It will deliver to you, as soon as available, two signed copies of
the Registration Statement as originally filed and of each amendment thereto and
two sets of the exhibits thereto, and will also deliver to you such number of
conformed copies of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) as you shall require for the purposes
contemplated by the Act.
(c) It will deliver to you from time to time, before the Registration
Statement becomes effective, such number of copies of the Registration Statement
as originally filed and any amendments thereto and as soon as the Registration
Statement initially becomes effective and thereafter from time to time during
the period when the Prospectus is required to be delivered under the Act, such
number of copies of the Prospectus (as amended or supplemented) as you may
reasonably request for the purposes contemplated by the Act or the Regulations.
(d) During the period when the Prospectus is required to be delivered
pursuant to the Act, the Company will comply, so far as it is able and at its
own expense, with all requirements imposed upon it by the Act, as now and
hereafter amended, and by the Regulations, as from time to time in force, so far
as necessary to permit the continuance of sales of or dealings in, the
Securities during such period in accordance with the provisions herein and as
set forth in the Prospectus.
(e) If any event relating to or affecting the Company or the Mortgages
Loans shall occur as a result of which it is necessary to amend or supplement
the Prospectus in order to make the Prospectus not misleading in the light of
the circumstances existing at the time it is delivered to a subscriber, the
Company will forthwith prepare and furnish to you, without expense to you, a
reasonable number of copies of an amendment or amendments of, or a supplement or
supplements to, the Prospectus which will amend or supplement the Prospectus so
that as amended or supplemented it will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a subscriber, not misleading. For the purposes of
this subsection the Company will furnish such information with respect to
themselves as you may from time to time reasonably request.
(f) It will make generally available to the Company's security holders
(i.e., the holders of Shares) as soon as practicable, but not later than 120
days after the close of the period covered thereby, an earnings statement of the
Company (in form complying with the provisions of Section 11(a) of the Act and
Rule 158 promulgated thereunder, which need not be certified by independent
public accountants unless required by the Act or the Regulations) covering the
twelve-month period beginning not later than the first day of the Company's
fiscal quarter following the effective date of the Registration
132
<PAGE> 6
Statement. As used in this subsection, the terms "earnings statement" and "made
generally available to the Company's security holders" shall have the meanings
contained in Rule 158 promulgated under the Act.
(g) It will, so long as any Securities remain outstanding, furnish
directly to you the following:
(i) as soon as practicable after the end of each fiscal year,
one copy of the Company's annual report, including therein the accountants'
report, the balance sheet, the related statements of profit and loss and cash
flows for the Company (which need not be audited), together with such
accountants' comments and notations with respect thereto in such detail as the
Company may customarily receive from such accountants;
(ii) as soon as practicable after the end of each fiscal
quarterly period, one copy of a balance sheet of the Company as at the end of
such period, setting forth in reasonable detail its financial position, together
with related statements of profit and loss and cash flows, none of which
statements need be audited, but shall be certified as correct by the Chief
Financial Officer of the Company;
(iii) copies of any report, application or documents which the
Company shall file with the Commission;
and
(iv) as soon as the same shall be sent to holders of Shares,
each communication which shall be sent to the holders of Shares, including any
other annual or interim report of the Company.
(h) It will deliver to you, from time to time, all supplemental sales
material (whether designated solely for broker-dealer use or otherwise) proposed
to be used or delivered by the Company in connection with the offering of
Securities.
SECTION 4. Covenants of Brookstreet Securities Corporation.
You covenant with the Company as follows:
(a) You agree to manage the distribution of the Securities and to sell
the Securities according to all of the terms and conditions of the Registration
Statement, the Rules of the NASD, all applicable state and federal laws,
including the Securities Act of 1933, as amended, and any and all regulations
related thereto. You shall not have any authority to give any information or
make any representations in connection with any offer or sale of the Securities
other than as contained in the Prospectus or as is otherwise expressly
authorized in writing by the Company, provided, however, that you shall use only
such sales literature and/or advertising in connection with the sale of the
Securities as shall be approved by the Company.
(b) The Securities shall be offered and sold only where the Securities
may be legally offered and sold, and only to such persons in such states who
shall be legally qualified to purchase the Securities. The Company shall give
you written notice at the time of effectiveness of the Registration Statement of
those states in which the offering and sale of the Securities may be made, and
shall amend such notice thereafter as additional states are added. No Securities
shall be offered or sold in any other states.
(c) Neither you nor any person associated with you shall give any
information, written or oral, or make any representation, written or oral, in
connection with the offering other than those contained in the Prospectus or
such other material as may be provided or approved by the Company.
(d) You agree to engage as Selected Dealers only entities affiliated
with you by direct or indirect ownership or entities which are members of the
NASD.
133
<PAGE> 7
SECTION 5. Payment of Expenses and Fees.
The Company will pay all expenses incident to the performance of the
obligations of the Company under this Managing Dealer Agreement, including (i)
the printing and delivery to you in quantities as hereinabove stated of copies
of the Registration Statement and all amendments thereto and of the Prospectus
and any supplements or amendments thereto; (ii) the printing, execution, filing
and delivery to you in quantities as hereinabove stated of copies of any
supplemental sales material to be used in connection with the offering approved
by the Company and utilized in sales of the Securities directly to the public;
(iii) the listing of the Shares on the NASDAQ-NMS, including filing fees; (iv)
the fees and disbursements of counsel and accountants for the Company; and (v)
the filing fee of the NASD.
Expenses of the Offering: The Trust shall bear all costs and expenses
incident to the registration, issuance and delivery of the Securities,
specifically all expenses and fees incident to preparation and filing of the
registration statement and the amendments thereto, the Trust's counsel fees for
qualification of the offering under state securities laws in such states as may
be designated by you, the fees and reimbursements of counsel and the accountants
for the Trust, the cost of printing the registration statement and such number
of "Red Herring" prospectuses as we may determine to be appropriate, fees of the
Trust's transfer agent and registrar, the filing fee with the SEC and the
National Association of Securities Dealers and all such cost and fees of listing
the Common Stock on NASDAQ-NMS. The Trust shall not be required to pay or
advance you more than $145,000 for the following: 1) due diligence expense; 2)
Managing Dealer's counsel legal fees; 3) printing of the prospectuses and
supplements thereto and other necessary marketing material; and 4) $10,000 per
month non-accountable expenses provided below which shall be paid by you. All of
your other expenses shall be borne by you to be reimbursed to you only from the
proceeds of the offering up to a maximum of 3% of the offering proceeds as set
forth in subsubparagraph (b), below.
The Trust will reimburse you from the proceeds of the Offering an
amount equal to 3% of the gross Offering proceeds. In addition to the $35,000
signing fee described below, the Trust agrees to advance the sum of $10,000 per
month for up to eleven (11) months commencing on the date you give your consent
to proceed with the Offering, which consent shall be given within 10 days of the
Trust's receipt of the initial comments of the SEC. Upon conclusion of the
offering the exact amount of the 3% Non-Accountable expense allowance shall be
calculated. To the extent the 3% non-Accountable expense allowance exceeds
$145,000 there shall be deducted from the amount due to you the amount of the
expense reimbursement payment (up to $145,000) previously made or advanced by
the Trust to you pursuant to this sub-paragraph (iii). To the extent the 3%
Non-Accountable expense allowance equals or is less than $145,000 (resulting
from gross offering proceeds of approximately $4,835,000 or less) the Trust
shall pay you an amount equal to 3% of the actual gross offering proceeds,
provided that if the aggregate amount advanced by the Trust to you pursuant to
this sub-paragraph (iii) (up to $145,000) exceeds 3% of the gross offering
proceeds, you shall be entitled to retain the entire amount of such previous
advances without refund to the Trust. In the event the offering is canceled
because the Trust elects not to proceed with the Offering for any reason (other
than your failure to adequately perform), the Trust will pay all of your costs
and expenses, including, but not in excess of, (a) the fee of $35,000 which has
been advanced to you upon the signing of the Letter of Intent dated May 8, 1996
(b) any of the $10,000 monthly payment previously made (c) due diligence expense
including third party reports that have been pre-approved and produced by such
firms as Houlihan Valuation Advisors (d) Managing Dealer's Counsel legal fees
(e) all costs related to the printing of the Prospectuses and other necessary
marketing material (if previously approved by us). In the event the offering is
canceled by you for a reason other than the one set forth in paragraph 9(b) the
Trust's maximum obligation to Brookstreet Securities shall be limited to the
amount (up to $145,000) advanced pursuant to this sub-paragraph.
Such commissions, fees and expense allowances shall be paid or advanced
by the Trust to you by the Escrow Holder out of the funds deposited in the
Escrow Account on the applicable Closing Date. Notwithstanding the foregoing, if
the Minimum Offering is not achieved, you will not receive any of the foregoing
compensation, except for compensation negotiated and paid to you in connection
with a transaction that occurs in lieu of the Minimum Offering as a result of
your efforts, provided that you shall be entitled to reimbursement for your
out-of-pocket accountable expenses actually incurred by you in connection with
the Minimum Offering, if not achieved.
134
<PAGE> 8
SECTION 6. Conditions of Your Obligations.
Your obligations hereunder are subject to the accuracy of and
compliance with the representations and warranties of the Company, to the
performance by the Company of its obligations hereunder and to the following
further conditions:
(a) The Registration Statement shall initially become effective not
later than 5:30 P.M., Eastern time, on the date hereof, or, with your consent,
at a later time and date not later, however, than 5:30 P.M., Eastern time, on
the date following the date hereof, or at such later time and date as may be
approved by you; and at the Initial Closing Date and no stop order suspending
the effectiveness thereof shall have been issued under the Act or proceeding
therefor initiated or threatened by the Commission and not rescinded. The Shares
shall have been approved for listing on the NASDAQ-NMS on notice of issuance.
(b) At the Initial Closing Date and each Subsequent Closing Date you
shall receive the opinion of Wilson, Ryan & Campilongo, as counsel for the
Company, in the form set forth in Exhibit B hereto.
(c) At the Initial Closing Date and each Subsequent Closing Date you
shall receive a certificate signed by the Company to the effect that (i) the
signer has carefully examined the Registration Statement and the Prospectus and,
in the signer's opinion, at the time the Registration Statement initially became
effective and at the Initial Closing Date and each Subsequent Closing Date, the
Registration Statement did not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and the Prospectus did not contain an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; (ii) since the initial effective date of
the Registration Statement no event has occurred which should have been set
forth in an amendment of, or supplement to, the Prospectus but which has not
been so set forth; (iii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings therefor have been
instituted or threatened by the Commission and not rescinded; (iv) the
representations, warranties and agreements contained in Section 1(a) are true
and correct in all material respects with the same effect as though expressly
made at the Initial Closing Date and each Subsequent Closing Date; and (v) since
the initial effective date of the Registration Statement, no material adverse
change in circumstance has occurred with regard to the transactions described in
any letters of intent contained in the Prospectus which should have been set
forth in an amendment of, or supplement to, the Prospectus, but which has not
been so set forth, provided, however, that with respect to clauses (i) and (ii)
above, such certificate may exclude from its coverage any matters relating to
you.
(d) At the time the Registration Statement initially becomes effective,
you shall have received from Novogradac & Company, LLP a letter, in form and
substance satisfactory to you and your counsel, advising that (i) they are
independent public accountants as required by the Act and the published
Regulations, (ii) it is their opinion that the financial statements of the
Company included in the Prospectus, and covered by their opinions therein,
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Regulations relating to financial statements in
registration statements on Form S-11, (iii) based on procedures set forth in
such letter nothing has come to their attention which would indicate that during
the period from April 30, 1996 to a specified date not more than five business
days prior to the date the Registration Statement becomes effective there has
been any change in the equity, capital accounts, or short-term or long-term
indebtedness of the Company or any decrease in net assets as compared with the
amounts shown in the balance sheet as of April 30, 1996, included in the
Registration Statement, except for changes or decreases that the Registration
Statement discloses have occurred or may occur; (iv) they have carried out
certain procedures, as specified in a draft of such letter approved by you,
performed for the purpose of comparing certain financial information and
percentages appearing in the Registration Statement, as specified in such draft
letter, with indicated amounts in the financial statements or accounting records
of the Company and certain of its affiliates and have found such information and
percentages to be in agreement with the relevant accounting and financial
information of the Company and certain of its affiliates.
At the Initial Closing Date and each Subsequent Closing Date,
you shall receive from Novogradac & Company, LLP a letter dated as of the
Closing Date or Subsequent Closing Date to the effect that they reaffirm, as of
such date and as though made at such date, the statements made in the letter
furnished by such accountants pursuant to this subsection (e) of this Section 6,
except that the specified date referred to in such subsection will be a date not
more than five days prior to the Initial Closing Date or Subsequent Closing
Date.
135
<PAGE> 9
(e) At the Initial Closing Date and each Subsequent Closing Date,
Wilson, Ryan & Campilongo shall have been furnished with such additional
information, opinions and documents, including supporting documents relating to
parties described in the Prospectus and certificates signed by such parties with
regard to information relating to them and included in the Prospectus as they
may reasonably require for the purpose of enabling them to pass upon the sale of
the Securities as herein contemplated and related proceedings, in order to
evidence the accuracy or completeness of any of the representations or
warranties or the fulfillment of any of the conditions herein contained; and all
actions taken by the Company in connection with the sale of the Securities as
herein contemplated shall be reasonably satisfactory in form and substance to
you and WRC.
(f) If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Managing Dealer Agreement to be
fulfilled, this Managing Dealer Agreement and all your obligations hereunder may
be canceled by you by notifying the Company of such cancellation in writing or
by facsimile or telegram at any time at or prior to the Initial Closing Date, or
at any time after the Initial Closing Date, all your obligations hereunder may
be canceled or terminated by you by notifying the Company of such cancellation
or termination in writing or by telegram at any time at or prior to the Offering
Termination Date and any such cancellation or termination shall be without
liability of any party to any other party except as otherwise provided in
Section 6.
SECTION 7. Indemnification.
(a) The Company agrees to indemnify and hold harmless you, your
representatives and employees, and each person, if any, who controls you within
the meaning of Section 15 of the Act, you and such person (referred to
collectively as the "Indemnified Parties"), as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto) or any omission or alleged omission therefrom of a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading or arising out of any untrue statement or alleged untrue statement of
a material fact contained in the Prospectus (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made not misleading unless such untrue
statement or omission was made in reliance upon and in conformity with
information furnished to the Company in writing by you expressly for use in the
Registration Statement (or any amendment thereto) or the Prospectus (or any
amendment or supplement thereto);
(ii) against any and all loss, liability, claim, damage and
expense whatsoever arising out of any untrue statement or alleged untrue
statement of a material fact contained in any supplemental sales material
approved by the Company for use by you, or any omission or alleged omission
therefrom of a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under which
they were made and in conjunction with the Prospectus delivered therewith, not
misleading; provided, however, that with respect to any indemnification relating
to supplemental sales material designated for broker-dealer use only such
indemnification shall be limited to any untrue statement or alleged untrue
statement of a material fact or any omission or alleged omission of a material
fact related to the Company or the offering;
(iii) against any and all loss, liability, claim, damage and
expense whatsoever to the extent of the aggregate amount paid in settlement of
any litigation, commenced or threatened, or of any claim whatsoever based upon
any such untrue statement or omission or any such alleged untrue statement or
omission as provided in subparagraph (a)(i) and (a)(ii) above, if such
settlement is effected with the written consent of the Company; and
(iv) against any and all expense whatsoever reasonably
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under clause (i), (ii) or (iii) above.
The foregoing indemnity agreement is subject to the condition
that, insofar as it relates to any untrue statement, alleged untrue statement,
omission or alleged omission made in the Prospectus or any supplemental sales
material, it shall not inure to the benefit of any of the Indemnified Parties if
you failed to send or give a copy of the Prospectus (as
136
<PAGE> 10
amended or supplemented, if the Company shall have furnished any amendment or
supplement thereto to you which shall correct such untrue statement or omission
which is the basis of the loss, liability, claim, damage or expense for which
indemnification is sought) to the person asserting any such loss, liability,
claim, damage or expense prior to or together with the written confirmation of
the receipt of the Order for Securities from such person; or if you sell any
Securities and deliver to the person asserting any such loss, liability, claim,
damage or expense a Prospectus containing an alleged untrue statement or
omission which is the basis of the loss, liability, claim, damage or expense for
which indemnification is sought at a time subsequent to having been notified by
the Company that it believes that such Prospectus should be amended or
supplemented.
(b) You agree to indemnify and hold harmless the Company, each of its
representatives and employees, and each person, if any, who controls any such
person, within the meaning of Section 15 of the Act, to the same extent as the
foregoing indemnity from the Company in Section 7(a) but only with respect to
statements or omissions in the Registration Statement (or any amendment thereto)
or the Prospectus (or any amendment or supplement thereto) or relating to you or
your affiliates in the supplemental sales literature distributed to the public
made in reliance upon and in conformity with information furnished to the
Company in writing by you expressly for use in the Registration Statement (or
any amendment thereto) or the Prospectus (or any amendment or supplement
thereto) or the supplemental sales literature distributed to the public. In case
any action shall be brought against the Company based on the Registration
Statement (or any amendment thereto) or the Prospectus (or any amendment or
supplement thereto) or the supplemental sales literature distributed to the
public and in respect of which indemnity may be sought against you, you shall
have the rights and duties given to the Company, and the Company shall have the
rights and duties given to you, by the provisions of Sections 7(a), 7(b) and
7(c).
(c) In no case shall the Company be liable under this indemnity
agreement with respect to any claim made against any of the Indemnified Parties
unless the Company shall be notified in writing of the nature of the claim
within a reasonable time after the assertion thereof, but failure so to notify
the Company shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. In no case shall the Company be
liable under this indemnity agreement to the Indemnified Parties for any loss,
liability, claim, damage or expense described in subparagraph 7(a) above if such
loss, liability, claim, damage or expense arose entirely or primarily, directly
or indirectly, from your negligence, misconduct, or fault. For purposes of the
foregoing sentence, an Indemnified Party shall be considered at fault for
purposes of this Managing Dealer Agreement if, without limitation, such
Indemnified Party shall be found to be at fault by any order of any court having
jurisdiction or in any settlement agreement approved by any court having
jurisdiction. The Company shall be entitled to participate at its own expense in
the defense or, if it so elects within a reasonable time after receipt of such
notice, to assume the defense of any suit so brought, which defense shall be
conducted by counsel chosen by it and satisfactory to the Indemnified Parties,
defendant or defendants therein. In the event that the Company elects to assume
the defense of any such suit and retain such counsel, the Indemnified Parties,
defendant or defendants in the suit, shall bear the fees and expenses of any
additional counsel thereafter retained by them. In the event that the parties to
any such action (including impleaded parties) include the Company and any of the
Indemnified Parties and such Indemnified Party or Parties shall have been
advised by counsel chosen by such Indemnified Party or Parties and satisfactory
to the Company that there may be one or more legal defenses available to such
Indemnified Party or Parties which are different from or additional to those
available to the Company, the Company shall not have the right to assume the
defense of such action on behalf of such Indemnified Party or Parties and will
reimburse such Indemnified Party or Parties as aforesaid for the reasonable fees
and expenses of any counsel retained by such Indemnified Party or Parties, it
being understood that the Company shall not, in connection with any one action
or separate but similar or related actions in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one separate firm of attorneys for such
Indemnified Party or Parties, which firm shall be designated in writing by such
Indemnified Party or Parties. The Company agrees to notify you within a
reasonable time of the assertion of claim in connection with the sale of the
Shares against it, any of its officers or directors or any person who controls
the Company within the meaning of Section 15 of the Act.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 7 is for
any reason held by a court of competent jurisdiction to be unavailable to you
from the Company or to the Company from you, as the case may be, for any matters
covered by Sections 7(a) or 7(b), the Company and you shall contribute to the
aggregate losses, claims, expenses, damages and liabilities (including any
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claims
asserted) to which the Company and you may be subject as a result of a matter
referred to in Sections 7(a) or 7(b) in such
137
<PAGE> 11
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and you and your affiliates on the other from the
offering of the Shares and the operation of the Company or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and you and your affiliates on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and you and your
affiliates on the other shall be deemed to be in the same proportions so that
you and your affiliates are responsible for that portion represented by the
percentage that the sales commission and other compensation from the proceeds of
the offering and the operation of the Company received by you or your affiliates
in the aggregate bears to the aggregate payments made for the purchase of the
Shares, and the Company shall be responsible for the balance. The relative fault
of the Company on the one hand and you and your affiliates on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or by you and your affiliates on the other and the parties' relative intent,
knowledge and access to information. Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section 7(d), notify such
party or parties from whom contribution may be sought; and the omission so to
notify such party or parties will relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder as
to the particular item for which contribution is then being sought but not from
any other liability which it or they may have to the party seeking contribution.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery.
All representations, warranties and agreements contained in this
Managing Dealer Agreement (including your covenants provided in Section 4
hereof) or contained in certificates of the Company submitted pursuant hereto
shall remain operative and in full force and effect, regardless of any
investigation made by, or on behalf of, you or any person who controls you, or
by or on behalf of the Company and shall survive the Offering Termination Date.
SECTION 9. Effective Date of this Managing Dealer Agreement and
Termination Thereof.
(a) This Managing Dealer Agreement shall become effective (i) at 9:30
A.M., Eastern time, on the day on which the Registration Statement initially
becomes effective or (ii) at the time of the initial public offering by you,
after the Registration Statement initially becomes effective, of the Securities,
whichever shall first occur. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement, which is subsequently published, relating to the Securities or
the time at which the Securities are first generally offered by you to
subscribers by letter or telegram, whichever shall first occur. You or the
Company may prevent this Managing Dealer Agreement from becoming effective
without liability of any party to any other party, except as otherwise provided
in Section 4 by giving the notice indicated below in this Section prior to the
time when this Managing Dealer Agreement would otherwise become effective as
herein provided.
(b) You shall have the right to terminate this Managing Dealer
Agreement by giving the notice indicated below in this Section (A) at any time
at or prior to the Minimum Offering Date or any Subsequent Closing Date if there
shall have been, since the respective dates as of which information is given in
the Registration Statement and the Prospectus, any material adverse change in
the condition of the Company's Mortgages, the Company, financial or otherwise,
or in the earnings, affairs or business prospects of the Mortgages, the Company,
whether or not arising in the ordinary course of business, or (B) at any time at
or prior to the Minimum Subscription Date (i) if there shall have occurred any
new outbreak of hostilities or other national or international calamity or
crisis, or a bankruptcy default with respect to the debt obligations of, or the
institution of proceedings under the Federal bankruptcy laws by or against, any
State of the United States, the effect of such outbreak, calamity or crisis on
the financial markets of the United States being such as in your judgment would
make the offering or delivery of the Securities impracticable, or (ii) if
trading on the New York Stock Exchange shall have been suspended, or minimum or
maximum prices for trading shall have been fixed, or maximum ranges for prices
for securities shall have been required on such Exchange, or if a banking
moratorium shall have been declared by either Federal or California authorities.
If you terminate this Managing Dealer Agreement as provided in this Section,
such termination shall be without liability of any party to any other party
except as otherwise provided in Section 4.
138
<PAGE> 12
(c) If you elect to prevent this Managing Dealer Agreement from
becoming effective or to terminate this Managing Dealer Agreement as provided in
this Section 9, the Company shall be notified promptly by you, by telephone or
telegram, confirmed by letter. If the Company elects to prevent this Managing
Dealer Agreement from becoming effective as provided in this Section 9, you
shall be notified promptly by the Company by telephone or telegram, confirmed by
letter.
SECTION 10. Post-Effective Amendment.
The Company represents and warrants to you that if as of one year from
the effective date of this Offering (unless extended by the Trust) the Minimum
Offering has not been achieved, they will file a post-effective amendment to the
Registration Statement deregistering all of the Shares and if at the Offering
Termination Date subscriptions for all the Shares shall not have been received
they will file a post-effective amendment to the Registration Statement
de-registering the unsold Securities and will terminate any additional offerings
of Securities pursuant to such Registration Statement. In addition, the Company
represents and warrants to you that they will file all reports required by the
regulations with regard to sales of the Shares and use of the proceeds
therefrom.
SECTION 11. Notices and Authority to Act.
All communications hereunder shall be in writing and, if sent to you,
shall be mailed, delivered or telegraphed and confirmed to you at Brookstreet
Securities Corporation, 2361 Campus Drive, Suite 210, Irvine, California, 92612,
or, if sent to the Company, shall be delivered or telegraphed and confirmed at
Capital Alliance Income Trust, 50 California Street, Suite 2020, San Francisco,
California, 94111, with a copy to Stephen C. Ryan at Wilson, Ryan & Campilongo,
115 Sansome Street, Suite 400, San Francisco, California, 94104, with a copy to
Ronald Warner, Esq. at Thelen, Marrin, Johnson & Bridges, 333 South Grand
Avenue, Thirty-fourth Floor, Los Angeles, California, 90071.
SECTION 12. Parties.
This Managing Dealer Agreement shall inure to the benefit of and be
binding upon each of you, the Company and your and the Company's respective
successors, this Managing Dealer Agreement and the conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto and their respective successors and controlling persons, and for
the benefit of no other person, firm or corporation, except as otherwise
specifically provided herein.
SECTION 13. Applicable Law.
This Managing Dealer Agreement shall be construed in accordance with
the laws of the State of California Arbitration.
139
<PAGE> 13
If the foregoing is accordance with your understanding of our
agreement, kindly sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among you and the Company in
accordance with its terms.
Very truly yours,
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
a Delaware corporation
By:
---------------------------------------
Thomas B. Swartz, Chairman
ACCEPTED: Brookstreet Securities Corporation
By:
---------------------------------------
Stanley C. Brooks, President
140
<PAGE> 14
EXHIBIT A
CAPITAL ALLIANCE INCOME TRUST, A REAL ESTATE INVESTMENT TRUST
(a Delaware corporation)
SELECTED DEALER AGREEMENT
, 1996
----------------
Ladies/Gentlemen:
We have agreed to use our best efforts to sell up to (a) 1,500,000
Shares of Common Stock, $0.01 par value per share ("Shares") and (b) one (1)
Warrant to purchase one (1) share of Common Stock of the Company at $7.00 per
Share for each ten (10) Shares sold. The Shares and the Warrants are hereinafter
sometimes referred to collectively as the "Securities." The Securities are being
offered by us as agent for the Company. The Securities and the terms of the
offering are more fully described in the enclosed Prospectus, receipt of which
you hereby acknowledge.
We are hereby inviting you, , subject to the other
--------------------
terms and conditions set forth below and in such Prospectus, to solicit
subscriptions for the Securities. You hereby confirm that you are a dealer
actually engaged in the investment banking or securities business and that you
are a member in good standing of the National Association of Securities Dealers,
Inc. (the "NASD"). You hereby agree to comply with the provisions of Sections 24
and the Rules of the NASD, thereto, and if you are a foreign dealer and not a
member of the NASD, you also agree to comply with: (i) the NASD's interpretation
with respect to free-riding and withholding, (ii) the provisions of Sections 8
and 36 of Article III of such Rules of Fair Practice, as though you were a
member of the NASD, and (iii) Section 25 of Article III thereof as that Section
applies to non-member foreign dealers.
The public offering price of the Units is $10.00 per Share. We will pay
to you a commission of six percent of the gross proceeds from the sale of each
Share sold by the Company pursuant to an order in the form attached to the
Prospectus (an "Order") solicited by you. Payment will be made promptly on the
Initial Closing Date or any Subsequent Closing Date; provided, however, that in
the event that a sale of a Share for which you have solicited an Order shall not
occur, whether by reason of the failure of any condition specified herein or the
Managing Dealer Agreement, no commission or payment in respect thereof shall be
due. Commissions and payments will be payable only with respect to transactions
lawful in the jurisdiction where they occur.
Any "single purchaser" who purchases for Shares subsequent to an
initial purchase of Securities may combine all prior and subsequent purchases
for the purpose of determining the amount invested by such subscriber and the
applicable Securities purchase prices for such investments in the Company;
provided, however, that all purchasers are subject to the limitation regarding
the maximum amount of Company securities each, and certain persons affiliated
with them, can own, as described in the Prospectus.
You agree to submit on behalf of each person desiring to purchase
Securities, an Order in form and substance satisfactory to the Company and all
documents, if any, required under state securities laws. You shall ascertain
that each Order has been properly completed. All payments for the Securities
shall be made by check payable to the order of "Golden Gate Bank, Escrow Agent -
CAIT."
You agree to promptly submit on behalf of each person desiring to
purchase Securities a completed Order, as well as all checks received by you
from subscribers to Golden Gate Bank, 344 Pine Street, San Francisco, CA 94104,
(the "Escrow Agent").
Subscriptions for Securities shall be made only during the offering
period described in the Prospectus.
You shall have no reasonable grounds to believe, on the basis of having
received and examined the Prospectus, that all material facts are not adequately
and accurately disclosed and provide a basis for evaluating an investment in the
141
<PAGE> 15
Company. For purposes of evaluating the Company, you recognize that under
Appendix F you may rely on the information from an inquiry conducted by another
NASD member only if you have reasonable grounds to believe that such inquiry was
conducted with due care, the results of the inquiry were given to you with the
permission of the NASD member that made the inquiry and that no NASD member that
participated in the inquiry is a sponsor or affiliate of the sponsor of the
Company.
All subscriptions solicited by you will be strictly subject to
confirmation by us and acceptance thereof by the Company. Neither you nor any
other person is authorized to give any information, written or oral, or make any
representations, written or oral, in connection with the offer and sale of
Securities other than those contained (i) in the Prospectus in connection with
the sale of any of the Securities or (ii) any supplemental sales material
supplied or prepared by the Company and delivered to you by the Company for use
in making offers of Securities. No dealer is authorized to act as agent for us
when offering any of the Securities to the public or otherwise, it being
understood that you and each other Selected Dealer are independent contractors
with us. Nothing herein contained shall constitute you or any other Selected
Dealer an association or partner with us.
Upon release by us, you may offer the Securities at the public offering
price, subject to the terms and conditions hereof.
We, on behalf of the Company, will provide you with such number of
copies of the enclosed Prospectus and such number of copies of amendments and
supplements thereto as you may reasonably request. We also will provide you with
certain supplemental sales material to be used by you in connection with the
solicitation of Securities of the Company. In the event you elect to use such
supplemental sales material, you agree that such material shall not be used in
connection with the solicitations of Securities unless accompanied or preceded
by the Prospectus as then currently in effect and as it may be amended or
supplemented in the future. You agree that you will deliver a copy of the
Prospectus, and any amendments or supplements thereto, to each person to whom
you make an offer of Securities and that you will not disseminate or publish any
advertisement relating to your solicitation of subscribers for the Securities
(including, without limitation, any so-called tombstone advertisement or any
advertisement relating to seminars) (i) the form of which has not been submitted
to the NASD by the Company and (ii) that has not been approved in writing by the
Company.
This Agreement shall terminate at the close of business on the 45th day
after the completion of the sale of all the Securities by the Company, unless
earlier terminated.
We shall have full authority to take such action as we may deem
advisable in respect to all matters pertaining to the offering. We shall be
under no liability to you except for lack of good faith and for obligations
expressly assumed by us in this Agreement. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not
constitute, a waiver by you of compliance with any provision of the Securities
Act of 1933, as amended (the "1933 Act"), or of the rules and regulations
thereunder.
Upon application to us, we will inform you as to the jurisdictions in
which we believe the Securities have been qualified for sale under, or are
exempt from the requirements of, the respective securities laws of such
jurisdictions, but we assume no responsibility or obligation as to your right to
sell the Securities in any jurisdiction. You agree that we may limit the number
of offers and sales which may be made, or the number of the Securities which may
be sold, by you in any jurisdiction. You agree not to sell the Securities in any
jurisdiction where such sale by you is prohibited.
You warrant and represent that you and your agents and employees are
duly licensed to sell the Securities in those jurisdictions in which you do so.
You further agree that you will promptly notify us of any changes in your, or
your agent's or employee's, status as a licensed broker-dealer in any
jurisdiction in which you or your agent or your employee has been offering or
selling the Securities. If necessary, we will cause to be filed with the
Department of State of New York a Further State Notice with respect to the
Securities and will cause to be sent to the Pennsylvania Securities Commission a
list of the Selected Dealers to whom this Agreement is initially being sent.
You confirm that you are familiar with Securities Act Release No. 4698
and Rule 15c2-8 under the 1934 Act, relating to the distribution of preliminary
and final prospectuses, and confirm that you have complied and will comply
therewith. We will make available to you, to the extent they are made available
to us by the Company, such number of copies
142
<PAGE> 16
of the Prospectus as you may reasonably request for the purposes contemplated by
the 1933 Act, the 1934 Act, and the applicable rules and regulations thereunder.
In making any offer or sale of the Securities, you shall comply with
the provisions of the 1933 Act and the 1934 Act, you shall comply with all of
the provisions of this Selected Dealer Agreement, and you shall take all
necessary actions pursuant to instructions given by counsel to the Company or us
or otherwise required to permit the offer and sale of the Securities to comply
with the securities or "blue sky" laws of the jurisdictions in which you make
offers or sales of the Securities.
This Agreement shall inure to the benefit of and be binding upon the
parties and their respective successors and permitted assigns, this Agreement
and its conditions and provisions being for the sole and exclusive benefit of
the parties hereto and their respective successors and permitted assigns, and
for the benefit of no other person, firm, partnership or corporation.
The terms used herein, unless defined otherwise, shall have the same
meaning as in the Managing Dealer Agreement.
This Agreement may be amended only by means of a written document,
signed by the party to be bound, and may not be assigned by you without our
prior written consent.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
Any notice from us to you shall be deemed to have been duly given if
mailed or telegraphed to you at the address to which this Agreement is mailed.
Please confirm your agreement hereto by signing and returning at once
to us at 2361 Campus Drive, Suite 210, Irvine, California 92612. Upon receipt
thereof, this letter and such signed duplicate copy will evidence the agreement
between us.
Very truly yours,
BROOKSTREET SECURITIES CORPORATION
By:
-------------------------------------
Stanley C. Brooks, President
Accepted:
- --------------------------------------
(Signature of Selected Dealer)
- --------------------------------------
(Address to which all communications
are to be sent)
Fax No.:
------------------------------
143
<PAGE> 1
EXHIBIT No. 3.1
CERTIFICATE OF INCORPORATION
OF
CAPITAL ALLIANCE, INC.
- --------------------------------------------------------------------------------
ARTICLE I
The name of this corporation is CAPITAL ALLIANCE, INC.
ARTICLE II
The address of its registered office in the State of Delaware is No.
1209 Orange Street, in the City of Wilmington, County of New Castle. The name of
its registered agent at such address is The Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
4.1 Capitalization. This Corporation is authorized to issue 12,000,000
Shares and shall have two classes of Shares designated respectively "Common
Stock" and "Preferred Stock," and referred to either as Common Stock or Common
Shares and Preferred Stock or Preferred Shares, respectively. The number of
shares of Common Stock is 10,000,000, with a par value of $.01 per Share, and
the number of shares of Preferred Stock is 2,000,000, with a par value of $.01
per Share. Preferred Shares may be issued from time to time in one or more
series. The first series of Preferred Stock shall (a) be designated as "Series A
Preferred"; (b) consist of 900,000 Shares; (c) be entitled to dividends as
provided in Section 4.3(a); (d) be entitled to receive, on liquidation,
dissolution, or winding up of the Corporation, the amount, and subject to the
conditions, provided in Section 4.3(b); and (e) be entitled to all other rights,
preferences and privileges, and be subject to all such restrictions, as are in
this Article IV granted to, or imposed upon, the Shares of Series A Preferred
Stock in Section 4.3(d). Except as to Series A Preferred Stock, the Board of
Directors is hereby authorized, except as to matters fixed as to Preferred
Shares in this Article IV: (a) to determine or alter the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series and, within the limitations or restrictions stated in any resolution of
the Board of Directors originally fixing the number of Shares constituting any
series; (b) to increase or decrease (but not below the number of Shares of any
such series then outstanding), the number of Shares of any such series after the
issue of Shares of that series; and (c) to determine the designation of any
series and to fix the number of Shares of any series.
4.2 Definitions. The terms defined in this Section 4.2 whenever used in
this Certificate of Incorporation ("Certificate") shall have (unless the context
otherwise requires) the respective meanings hereinafter specified in this
Section 4.2. In this Certificate of Incorporation, words in the singular number
include the plural, and in the plural number include the singular.
(a) Adjusted Net Capital Contribution shall mean, with
reference to each Share of either Series A Preferred Stock or Common Stock as of
any given date, regardless of the date of issuance of the amount paid therefor,
the Net Capital Contribution with respect to such Share reduced by the amount of
Distributions of Cash from Sales thereafter paid or declared per Share pursuant
to Section 4.3(b) with respect to Shares of the same class or series.
(b) Aggregate Adjusted Net Capital Contributions as of any
given date shall mean, with reference to either Series A Preferred or Common
Stock, the product of the Adjusted Net Capital Contributions of each share of
the Class and the number of outstanding shares of such class, each as of a given
date.
144
<PAGE> 2
(c) Cash Flow for any Fiscal Quarter or Fiscal Year or other
period shall mean (i) the sum of cash receipts from operations, including, but
not limited to, interest earned on the Corporation's investments in Home Equity
Loans, including Cash from Sales to the extent not distributed to Shareholders
as a return of capital; minus (ii) all cash expenses and costs incurred and paid
in connection with the ownership, servicing and management of Home Equity Loans
held by the Corporation, including, but not limited to, fees payable to the
Advisor or its Affiliates to the extent not deferred, insurance premiums,
accounting and legal fees and expenses; debt collection expenses; property taxes
or other charges, assessments or levies imposed on or with respect to Home
Equity Loans held by the Corporation; debt service (but not including
depreciation or amortization of capital expenditures), including, without
limitation, organization expenses.
(d) Cash from Sales shall mean cash proceeds realized by the
Corporation from the sale, exchange or other disposition of any of its portfolio
of Home Equity Loans (or a portion thereof), sale of foreclosure property and
other assets, net of any expenses associated with such sale or other set-offs,
reserves or holdbacks. Cash from Sales shall include cash funds from reserves
which the Advisor determines, in its sole discretion, may be distributed to the
Shareholders and
(e) Contribution means any money, property or services
rendered, or a promissory note or other obligation to contribute money or
property, or other valuable consideration as permitted by the Delaware General
Corporation Law, which a Class "A" or Class "B" Shareholder contributes to the
Corporation as capital in that shareholder's capacity as Shareholder pursuant to
this Certificate.
(f) Directors means, as of any particular time, Directors
holding office under this Certificate of Incorporation at such time, whether
they be the Directors named herein or additional or successor Directors, and
shall not include the officers, representatives or agents of the Corporation, or
the Shareholders, but nothing herein shall be deemed to preclude a Director from
also serving as an officer, representative, or agent of the Corporation, or
owning Shares.
(g) Distributable Cash Flow means Cash Flow less such amounts
as the Directors, in their sole discretion, determines should be set aside for
the establishment, restoration or enhancement of reserves.
(h) Distributions means any transfer of money or property by
the Corporation to a Shareholder without consideration.
(i) ERISA means the Employee Retirement Income Security Act of
1974, as amended from time to time.
(j) Excess Distributions for any fiscal year means
Distributions of Distributable Cash Flow declared by the Directors, after all
distributions on the Series A Preferred Shares and the Common Shares required by
Section 4.3(a) and Section 4.3(b), respectively, have been declared to the
holders of the Series A Preferred Shares and the Common Shares.
(k) Home Equity Loan means any home equity loan secured by a
Mortgage upon a parcel of improved well-located residential property of one to
four living units in the States of California, Oregon, Washington, Nevada, Utah
and Colorado, which loan is acquired by the Corporation and which is secured
primarily by a second Mortgage, although a portion of such loans may be secured
by first and/or third trust deeds.
(l) Mortgage means mortgages, deeds of trust or other security
deeds on real property or rights or interests in real property.
(m) Net Asset Value means the aggregate of the book value of
all Home Equity Loans plus other corporate assets less all liabilities and bad
debt reserves of the Corporation.
(n) Net Capital Contributions means, with respect to a Series
A Preferred Share and/or Common Share, the gross price per Share to the
Shareholder upon the original issuance of such Shares, less the Sales Charge
attributable to such Share.
(o) (Intentionally Omitted)
145
<PAGE> 3
(p) Prime Rate means, during any calendar month, the Prime
Rate (or base rate) reported in the Money Rates column of the Wall Street
Journal published on the first business day of each month. In the event the Wall
Street Journal ceases publication of the Prime Rate, the Prime Rate shall mean
the Prime Rate (or base rate) in effect for Bank of America, San Francisco,
California, on the first business day of each month.
(q) Sales Charge means the amount of compensation paid to
broker-dealers by the Corporation and its predecessor entities pursuant to the
selected selling agent agreements and to others in connection with the offer and
sale of Shares.
(r) Selling Agent means any broker-dealer who has executed a
selected agent agreement, in which such broker-dealer agrees to participate in
the offer and sale of Shares.
(s) Series A Preferred Shares shall mean the Shares described
in Section 4.1.
(t) Series A Preferred Preference Amount for each calendar
month shall mean one-twelfth (1/12th) of the product of (i) the lesser of (a)
10.25% or (b) 150 basis points plus the Prime Rate times (ii) the Aggregate
Adjusted Net Capital Contributions of the Series A Preferred Shares calculated
as of the Distribution record date falling within that period.
(u) Series A Preferred Shareholders shall mean the holders of
Series A Preferred Shares.
4.3 Rights, Preferences and Privileges of Shares. The rights,
preferences, privileges and restrictions granted to or imposed upon Common and
Series A Preferred Shares and the holders thereof with respect to Distributions
from Distributable Cash Flow shall be as follows:
(a) Distributions.
(1) Before any Distributions from Distributable Cash
Flow may be declared on the Common Shares in or with respect to any calendar
month or other period during a calendar year, the Board of Directors shall
declare on the outstanding Series A Preferred Shares Distributions from
Distributable Cash Flow in an amount up to or equal to the Series A Preferred
Preference Amount for such month or annual period;
(2) After Distributions from Distributable Cash Flow
are declared with respect to the Series A Preferred Shares for or with respect
to a calendar month or other period during a calendar year and in an amount
equal in the aggregate to the Series A Preferred Amount for such year and before
any further Distributions from Distributable Cash Flow are declared on Series A
Preferred Shares during or with respect to such month or period, the Board of
Directors may declare out of Distributable Cash Flow a Distribution on each of
the Common Shares until an amount up to, or equal to, the amount distributed
under Section 4.3 (a)(1), above, on each of the Series A Preferred Shares with
respect to such month or period is distributed on each Common Share; and
(3) If the Board of Directors shall elect to declare
Excess Distributions in or with respect to a calendar month or other period
during a calendar year, such Excess Distributions may be declared, but only if
the amount of all Distributions from Distributable Cash Flow (other than
pursuant to (a)(1) and (a)(2), above) to be paid as Excess Distributions on each
Series A Preferred Share and on each Common Share shall be equal.
(4) The right to Distributions on Series A Preferred
Shares set forth in this Section 4.3 shall not be cumulative and no right shall
accrue to the holders of Series A Preferred Shares by reason of the fact that
distributions on Series A Preferred Shares have not been paid or declared with
respect to any prior calendar month or other period or by reason of the fact
that such Distributions, if any, during any period are less than the Series A
Preferred Share Preference Amount per share.
(b) Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the Corporation, the holders of
Series A Preferred Shares shall be entitled to receive, out of the assets of the
Corporation, whether those assets are capital or surplus of any nature, an
amount equal to the Adjusted Net Capital Contributions per
146
<PAGE> 4
Series A Preferred Share held and a further amount equal to any unpaid
Distributions accrued, as provided in paragraph (a) of this Section 4.3, to the
date that payment is made available to the holders of Series A Preferred Shares.
After payment to the holders of Common Shares of an amount equal to their
Adjusted Net Capital Contribution per Common Share, the remaining distributable
assets of the Corporation shall be distributed in like amounts per Share to the
holders of the Series A Preferred Shares and the holders of the Common Shares.
If, upon liquidation, dissolution, or winding up, whether
voluntary or involuntary, the assets distributed among the holders of the Series
A Preferred Shares shall be insufficient to permit the payment to those
shareholders of the full Adjusted Net Capital Contribution per Series A
Preferred Share and any accrued but unpaid Distributions, then the entire assets
of the Corporation to be distributed shall be distributed ratably among the
holders of Series A Preferred Shares.
A consolidation or merger of the Corporation with or into any
other business entities or a sale of all or substantially all of the assets of
the Corporation, shall not be deemed to be a liquidation, dissolution, or
winding up, within the meaning of this paragraph (b).
(c) Optional Redemption of Series A Preferred Shares.
Beginning upon the filing of this Certificate and subject to the restrictions,
terms and conditions of this Section 4.3(c), a Class A Preferred Shareholder,
with the consent of the Directors, may have all or a portion of the Class A
Preferred Shares held by him redeemed by the Corporation. Such redemption shall
be made on the June 30 next following the Corporation's receipt of a Class A
Preferred Shareholder's written request therefor (the "Redemption Date"),
provided that such request shall have been received by the Corporation on or
before May 15 of such year. The Directors may, in their sole, arbitrary
discretion, delay, postpone, deny or consent to any or all such requests for
redemption. The Redemption Amount to be paid for redemption of such Class A
Preferred Shares shall be the Adjusted Net Capital Contribution plus accrued but
unpaid Distributions attributable to the Class A Preferred Shares which the
Class A Preferred Shareholder requests be redeemed, divided by the Aggregate Net
Capital Contributions plus accrued but unpaid Distributions attributable to all
Class A Preferred Shares outstanding, multiplied by the Net Asset Value of the
Corporation (as defined below) attributable to the Class A Preferred Shares
computed as of the March 31 preceding the Redemption Date. The Net Asset Value
of the Corporation attributable to the Class A Preferred Shares shall be that
percentage of the Corporation's Net Asset Value that the Aggregate Adjusted Net
Capital Contributions of all Class A Preferred Shares bears to the Adjusted Net
Capital Contributions of all Shares outstanding. A contingent liquidation
charge, computed as follows, shall be charged to the Shareholder and paid to the
Corporation in connection with each redemption of Shares:
<TABLE>
<CAPTION>
Year of Redemption Liquidation Charge
------------------ ------------------
<S> <C>
1996 3% of Redemption Amount
1997 2% of Redemption Amount
1998 1% of Redemption Amount
1999 None
</TABLE>
The holder of Class A Preferred Shares to be redeemed on the
Redemption Date shall cease to be entitled to Distributions, voting rights and
other benefits with respect to such Class A Shares as of the May 30 prior to the
Redemption Date, except for the right to the payment of the Redemption Amount as
reduced by the Liquidation Charge; provided, however, if the Directors postpone
or delay such date for the redemption of the subject Class A Preferred Shares
beyond June 30, the date for the suspension of said Shareholder rights and
benefits shall be delayed proportionately.
(d) Voting Rights. The holders of the Common Shares and of the
Series A Preferred Shares issued and outstanding, except as otherwise provided
by law or by this Certificate of Incorporation, shall have the right to notice
of shareholders' meetings, and the rights and powers to vote upon the election
of Directors (subject to Article VIII which restricts the use of written
consents for the election and removal of Directors) or upon any other matter as
set forth in the Delaware General Corporation Law or the Certificate of
Incorporation or the Bylaws of the Corporation.
(e) Protective Provisions. So long as any of the Series A
Preferred Shares shall be outstanding the Corporation shall not, without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the total
number of Series A Preferred Shares outstanding:
147
<PAGE> 5
1. Alter or change the rights, preferences, or
privileges of the Series A Preferred Shares so as to materially and
adversely affect the Series A Preferred Shares; or
2. Increase the authorized number of Series A
Preferred Shares; or
3. Create any new class or series of Shares
having preferences over or being on a parity with the Series A
Preferred Shares as to dividends or assets, unless the purpose of
creation of the new class or series is, and the proceeds to be derived
from its sale and issuance thereof are to be used for, the retirement
of all Series A Preferred Shares then outstanding; or
4. Merge or consolidate with any other trust,
entity or corporation, except into or with a wholly owned subsidiary
corporation; or
5. Sell, convey, or otherwise dispose of, or
create or incur any mortgage, lien, charge, or encumbrance on or
security interest in or pledge of, or sell and lease back, all or
substantially all of the property or business of the Corporation.
ARTICLE V
The name and mailing address of the incorporator of this Corporation is
as follows:
Name Mailing Address
---- ---------------
Thomas B. Swartz 50 California Street, Ste. 2020
San Francisco, CA 94111
ARTICLE VI
The Corporation is to have perpetual existence.
ARTICLE VII
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter or repeal
the Bylaws of the Corporation.
ARTICLE VIII
Elections of directors need not be by written ballot, unless the Bylaws
of the Corporation shall so provide. Election and/or removal of Directors may
only be voted on by Shareholders at a meeting of Shareholders upon notice duly
given as provided in the Bylaws, and not by written consent of Shareholders
without a meeting.
Meetings of Shareholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time-to-time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE IX
9.1 Indemnification of Officers and Directors. Each person who was or
is a party to, or is threatened to be made a party to, or is otherwise involved
in any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative (a "proceeding"), by reason of being or having been a director or
officer of the Corporation, or of any predecessor corporation, or being or
having been a director or officer serving at the request of the Corporation as a
director, officer, employee or other agent of another corporation, partnership,
joint venture, trust, or other enterprise (including service with respect to
corporation-sponsored employee benefit plans), whether the basis of the
proceeding is an alleged action or inaction in an official capacity as a
director or officer or in any other capacity while serving as a director or
officer, shall,
148
<PAGE> 6
subject to the terms of any agreement between the Corporation and that person,
be indemnified and held harmless by the Corporation to the fullest extent
permissible under Delaware Law and this Certificate of Incorporation, against
all expense, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid in settlement) actually and
reasonably incurred or suffered by that person in connection therewith, except
that amounts shall be payable in settlement of a proceeding only if the
settlement is approved in writing by the Corporation. This indemnification shall
continue as to a person who has ceased to be a director or officer for acts
performed while a director or officer, and shall inure to the benefit of his or
her heirs, executors and administrators. Notwithstanding the foregoing, the
Corporation shall indemnify any such person in connection with a proceeding (or
part thereof) initiated by that person only if the proceeding (or part thereof)
was authorized by the Board of Directors. The right to indemnification conferred
in this Article IX shall include the right to be paid by the Corporation the
expenses incurred in defending and proceeding in advance of final disposition to
the fullest extent permitted by law, and such expenses shall be advanced by the
Corporation in advance of the final disposition of a proceeding upon delivery to
the Corporation of a written request for such payment and of an undertaking by,
or on behalf of, the director or officer to repay all amounts so advanced if it
shall be ultimately determined that the director or officer is not entitled to
be indemnified.
Notwithstanding the foregoing or any other provisions under this
Article IX, the Corporation shall not be liable under this Article IX to
indemnify a director or officer against expenses, liabilities or losses incurred
or suffered in connection with, or to make any advances with respect to, any
proceeding against and director or officer: (a) as to which the Corporation is
prohibited by applicable law from paying an indemnity; (b) with respect to
expenses of defense or investigation, if the expenses were or are incurred
without the Corporation's consent (which consent may not be unreasonably
withheld); (c) for which final payment is actually made to the director or
officer under an insurance policy maintained by the Corporation, except in
respect of any excess beyond the amount of payment under the policy; (d) for
which payment is actually made to the director or officer under an indemnity by
the Corporation otherwise than pursuant to this Article IX, except in respect of
any excess beyond the amount of payment under that indemnity; (e) based upon or
attributable to the director or officer gaining in fact any personal profit or
advantage to which not legally entitled; (f) for an accounting of profits made
from the purchase or sale by the director or officer of securities of the
Corporation pursuant to the provisions of Section 16(b) of the Securities
Exchange Act of 1934 and amendments thereto or similar provisions of any
federal, state or local statutory law; or (g) based upon acts or omissions
involving intentional misconduct or a knowing and culpable violation of law.
9.2 Indemnification of Employees and Agents. A person who was or is a
party or is threatened to be made a party or is otherwise involved in any
proceeding by reason of being or having been an employee or agent of the
Corporation or being or having been an employee serving at the request of the
Corporation as an employee or agent of another enterprise (including service
with respect to corporation-sponsored employee benefit plans), whether the basis
of the proceeding is an alleged action or inaction in an official capacity or in
any other capacity while serving as an employee or agent, may, upon appropriate
action by the Corporation and subject to the terms of any agreement between the
Corporation and that person, be indemnified and held harmless by the Corporation
to the fullest extent permissible under Delaware Law and this Certificate of
Incorporation, against all expense, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) actually and reasonably incurred or suffered by that person in
connection therewith.
9.3 Right of Directors and Officers to Bring Suit. If a claim under
Section 9.1 is not paid by the Corporation or on its behalf within 90 days after
a written claim has been received by the Corporation, the claimant may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim, and, if successful in whole or in part, the claimant also shall be
entitled to be paid the expense of prosecuting the claim.
9.4 Successful Defense. Notwithstanding any other provision of this
Article IX, to the extent that a director or officer has been successful on the
merits or otherwise (including the dismissal of a proceeding without prejudice
or the settlement with the written consent of the Corporation of a proceeding
without admission of liability), in defense of any proceeding referred to in
Section 9.1 or in defense of any claim, issue or matter therein, that director
or officer shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred in connection therewith.
149
<PAGE> 7
9.5 Indemnity Agreements. The Corporation may enter into agreements
with any director, officer, employee or agent of the Corporation providing for
indemnification to the fullest extent permissible under applicable law and this
Certificate of Incorporation.
9.6 Limitation of Liability. A Director of the Corporation shall not be
personally liable to the Corporation or its Shareholders for monetary damages
for breach of fiduciary duty as a Director, except for liability (a) for any
breach of the Director's duty of loyalty to the Corporation or its Shareholders,
(b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (c) under Section 174 of the Delaware
General Corporation Law, or (d) for any transaction from which the Director
derived an improper personal benefit.
9.7 Subrogation. In the event of payment by the Corporation of a claim
under Section 9.1 or 9.2 of this Article IX, the Corporation shall be subrogated
to the fullest extent of such payment to all of the rights of recovery of the
indemnified person, who shall execute all papers required and shall do
everything that may be necessary or appropriate to secure such rights, including
the execution of such documents necessary or appropriate to enable the
Corporation effectively to bring suit to enforce such rights.
9.8 Non-Exclusivity of Rights. The right to indemnification provided by
this Article IX shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, bylaw, agreement, vote of
shareholders or disinterested directors, or otherwise.
9.9 Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify that person against such expense,
liability or loss under Delaware law.
9.10 Expenses as a Witness. To the extent that any director, officer or
employee of the Corporation is, by reason of that position, a witness in any
action, suit or proceeding, he or she will be indemnified against all costs and
expenses actually and reasonably incurred by him or her or on his or her behalf
in connection therewith.
9.11 Non-Applicability to Fiduciaries of Employee Benefit Plans. This
Article IX does not apply to any proceeding against any trustee, investment
manager or other fiduciary of an employee benefit plan in that person's capacity
as such, even though that person may also be an agent of the Corporation. The
Corporation shall have the power to indemnify that trustee, investment manager,
or other fiduciary to the extent permitted by Delaware Corporation Law Section
102.
9.12 Separability. Each and every paragraph, sentence, term and
provision of this Article IX is separate and distinct, so that if any paragraph,
term or provision shall be held to be invalid or unenforceable for any reason,
its invalidity or unenforceability shall not affect the validity or
enforceability of any other paragraph, sentence, term or provision of this
Article IX. To the extent required, any paragraph, sentence, term or provision
of this Article IX may be modified by a court of competent jurisdiction to
preserve its validity and to provide the claimant with, subject to the
limitations set forth in this Article IX and any agreement between the
Corporation and the claimant, the broadest possible indemnification permitted
under applicable law.
9.13 Effect of Repeal or Modification. No repeal or modification of
this Article IX shall adversely affect any right of indemnification of a
director, officer, employee or agent of the Corporation existing at the time of
the repeal or modification with respect to any action or omission occurring
prior to such repeal or modification.
* * *
150
<PAGE> 8
THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, does make this certificate, hereby declaring and certifying,
under penalties of perjury, that this is my act and deed and the facts herein
stated are true, and, accordingly, has hereunder set may had this day of
-----
, 1995.
- ---------------------
----------------------------------------
Thomas B. Swartz, Incorporator
151
<PAGE> 9
EXHIBIT 3.1 (continued)
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CAPITAL ALLIANCE, INC.
A DELAWARE CORPORATION
Thomas B. Swartz certifies that:
1. He is the sole incorporator of the above-named corporation
("Corporation"). Directors were not named in the original Certificate of
Incorporation and have not been elected.
2. He hereby adopts the following amendment of the Certificate of
Incorporation of the Corporation:
Article I shall be amended to read as follows:
"Article I. The name of this corporation is Capital
Alliance Income Trust, A Real Estate Investment
Trust."
3. The Corporation has not received any payment for any of its
stock.
4. This amendment has been duly adopted in accordance with the
provisions of Section 241 of the Delaware General Corporation Law.
The Undersigned, being the sole incorporator of the Corporation and for
the purpose of amending the Certificate of Incorporation of the Corporation
pursuant to the General Corporation Law of the State of Delaware, does make this
certificate, hereby declaring and certifying, under penalties of perjury, that
this is my act and deed and the facts herein are true, and, accordingly, has
hereunder set my hand this day of February, 1996.
------
-------------------------------------
Thomas B. Swartz, Incorporator
152
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
CAPITAL ALLIANCE, INC.
A DELAWARE CORPORATION
153
<PAGE> 2
BYLAWS
OF
CAPITAL ALLIANCE, INC.
A Delaware Corporation
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I - THE TRUST: DEFINITIONS...................................................... 1.
1.1. Name.................................................................... 1.
1.2. Registered Office....................................................... 1.
1.3. Nature of Corporation................................................... 1.
1.4. Definitions............................................................. 1.
ARTICLE II - DIRECTORS.................................................................. 4.
2.1. Number, Term of Office and Qualifications of Directors.................. 4.
2.2 Vacancies............................................................... 4.
2.3. Nomination of Directors................................................. 4.
2.4. Place of Meetings....................................................... 4.
2.5. Meetings by Telephone................................................... 5.
2.6. Organizational Meeting.................................................. 5.
2.7. Other Regular Meetings.................................................. 5.
2.8. Special Meetings........................................................ 5.
2.9. Quorum.................................................................. 5.
2.10. Adjournment and Notice Thereof.......................................... 5.
2.11. Action Without Meeting.................................................. 5.
2.12. Removal................................................................. 6.
2.13. Committees of the Board................................................. 6.
2.14. Directors' Compensation................................................. 6.
ARTICLE III - DIRECTORS' POWERS......................................................... 6.
3.1. Power and Authority of Directors........................................ 6.
3.2. Specific Powers and Authorities......................................... 6.
3.3. Additional Powers....................................................... 9.
ARTICLE IV - EMPLOYMENT OF ADVISOR...................................................... 9.
4.1. Employment of Advisor................................................... 9.
4.2. Term.................................................................... 10.
4.3. Other Activities of Advisor............................................. 10.
ARTICLE V - INVESTMENT POLICY........................................................... 11.
</TABLE>
154
<PAGE> 3
<TABLE>
<S> <C>
5.1. General Statement of Policy............................................. 11.
5.2. Invested Assets......................................................... 11.
5.3. Restrictions............................................................ 12.
ARTICLE VI - OFFICERS................................................................... 13.
6.1. Officers................................................................ 13.
6.2. Election of Officers.................................................... 13.
6.3. Appointed Officers...................................................... 13.
6.4. Removal and Resignation of Officers..................................... 13.
6.5. Vacancies in Offices.................................................... 13.
6.6. Chairman of the Board................................................... 13.
6.7. Vice Chairman of the Board.............................................. 14.
6.8. President............................................................... 14.
6.9. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents... 14.
6.10. Secretary............................................................... 14.
6.11. Treasurer............................................................... 14.
ARTICLE VII - SHAREHOLDERS.............................................................. 15.
7.1. Place of Meetings....................................................... 15.
7.2. Annual Meetings......................................................... 15.
7.3. Special Meetings and Notice Thereof..................................... 16.
7.4 Adjourned Meetings and Notice Thereof................................... 16.
7.5. Voting At Meetings of Shareholders...................................... 17.
7.6. Quorum.................................................................. 17.
7.7. Action Without Meeting.................................................. 17.
7.8. Proxies................................................................. 17.
7.9. Inspectors of Election.................................................. 18.
ARTICLE VIII - MISCELLANEOUS............................................................ 18.
8.1. Record Dates and Closing of Transfer Books.............................. 18.
8.2. Inspection of Corporate Records......................................... 19.
8.3. Inspection of Bylaws.................................................... 19.
8.4. Representation of Shares of Corporations................................ 19.
8.5. Shareholders' Disclosures; Redemption of Shares......................... 19.
8.6. Right to Refuse to Transfer Shares...................................... 19.
8.7. Limitation on Acquisition of Shares..................................... 20.
8.8. Reliance................................................................ 20.
</TABLE>
155
<PAGE> 4
BYLAWS
OF
CAPITAL ALLIANCE, INC.
A Delaware Corporation
- --------------------------------------------------------------------------------
ARTICLE I - THE TRUST: DEFINITIONS
1.1. NAME. The name of the corporation is CAPITAL ALLIANCE, INC.
(the "Corporation").
If Capital Alliance Advisors, Inc., or any parent, subsidiary,
affiliate or successor of such corporation shall cease, for any reason, to
render to the Corporation the services of Advisor as defined in Section 1.4
hereof) pursuant to the contract referred to in Article IV hereof and any
renewal or extension of such contract, then the Directors shall, upon request of
Capital Alliance Advisors, Inc., or its successor, promptly amend the
Certificate of Incorporation ("Certificate") of the Corporation to change the
name of the Corporation to one which does not include any reference to "Capital
Alliance" or any approximation thereof, and shall cease using the words "Capital
Alliance" in its corporate documents and communications.
1.2. REGISTERED OFFICE. The registered office of the Corporation
shall be at 1209 Orange Street, in the City of Wilmington, County of New Castle,
Delaware. However, the Directors may, from time to time, change such location
and maintain other offices or places of business within or without the State of
Delaware, including the City and County of San Francisco, California. The name
of the registered agent at such address is The Corporation Trust Company.
1.3. NATURE OF CORPORATION. The Corporation is a corporation
organized under the laws of the State of Delaware, primarily to invest in, own
and dispose of Home Equity Loans. It is intended that the Corporation shall
carry on its business as a "real estate investment trust ("REIT") under the REIT
Provisions of the Internal Revenue Code.
1.4. DEFINITIONS. The terms defined in this Section 1.4 and in
the Certificate whenever used in these Bylaws shall, unless the context
otherwise requires, have the respective meanings hereinafter specified in this
Section 1.4 and in the Certificate. In these Bylaws words in the singular number
include the plural and in the plural number include the singular and a masculine
reference includes the feminine.
All terms defined in Section 4.2 of the Certificate shall have
the same meaning when used in these Bylaws.
(a) Act shall mean the Delaware General Corporation Law, as
amended from time to time.
(b) Advisor shall mean any Person appointed, employed or
contracted with by the Corporation under the provisions of Article IV hereof.
(c) Affiliate shall mean, with respect to any Person (i) any
Person directly or indirectly controlling, controlled by, or under common
control with another Person, (ii) any Person owning or controlling ten percent
(10%) or more of the outstanding voting securities of such other Person, (iii)
any officer, director or partner of such Person, and (iv) if such Person is an
officer, director or partner, any company for which such Person acts in any
capacity.
(d) Annual Meeting of Shareholders shall have the meaning set
forth in the first sentence of Section 7.2(a).
(e) Appraised Value shall mean the value according to an
appraisal made by an independent Qualified Appraiser of a professional valuation
company. An "independent" appraiser is one who is not "controlled" by the
Directors,
156
<PAGE> 5
the Advisor or its Affiliates. For purposes of the foregoing sentence, the term
"control" shall have the meaning ascribed to it in Rule 405 under the Securities
Act of 1933.
(f) Common Shares shall mean the Shares described in Section 4.1
of the Certificate.
(g) Common Shareholders shall mean the holders of the Common
Shares.
(h) Code means the Internal Revenue Code of 1986, as amended
from time to time.
(i) Controlling Person means any person, whatever his title, who
performs executive or senior management functions for the Advisor or its
Affiliates similar to those of executive or senior management officers,
directors or partners; or those holding 5% or more equity interest in the
Advisor or such Affiliate; or a person having the power to direct or cause the
direction of the management level employees and policies of the Advisor or such
Affiliate, whether through the ownership of a voting security, by contract or
otherwise. For the purposes of this definition, not every person who carries a
title such as vice president or senior vice president, corporate secretary or
treasurer shall be considered a Controlling Person, unless such person performs
the functions or has the powers described above, and even in the absence of a
specific title, an executive in a senior management position shall be considered
a Controlling Person.
(j) Certificate means the Certificate of Incorporation and all
amendments, restatements, or modifications thereof.
(k) Financing means indebtedness incurred by the Corporation.
(l) Fiscal Quarter means the three-month period ending on the
last day of the third, sixth, ninth and twelfth calendar months of each Fiscal
Year of the Corporation.
(m) Gross Income means the gross income of the Corporation
within the meaning of Section 61(a) of the Code.
(n) Majority in Interest means Shareholders holding more than
50% of the outstanding Shares of a specified class of Shares held by all
Shareholders of the specified class of Shares at the Record Date for any vote of
the Shareholders.
(o) Person means and includes natural persons, corporations,
limited partnerships general partnerships, associations, companies, trusts,
estates, custodians, nominees, or other individuals or entities in its own or
any representative capacity.
(p) Prime Rate means, during any calendar month, the prime rate
(or base rate) reported in the Money Rates column of the Wall Street Journal
published on the first business day of each month. In the event the Wall Street
Journal ceases publication of the Prime Rate, the Prime Rate shall mean the
prime rate (or base rate) in effect for Bank of America, San Francisco,
California, on the first business day of each month.
(q) Prospectus means the prospectus of the Corporation pursuant
to which the Corporation from time to time offers its Shares, as the same may at
any time and from time to time be amended or supplemented after the effective
date thereof.
(r) Purchase Price of Home Equity Loans means the price paid or
amount loaned upon the purchase or making of a Home Equity Loan.
(s) Qualified Appraiser means an appraiser who (i) is approved
by the Advisor, (ii) is registered on the approved appraiser list of at least
four lending institutions, (iii) maintains at least $500,000 in errors and
omissions insurance, and (iv) demonstrates qualification by membership in a
recognized appraisal society or otherwise to the satisfaction of the Advisor.
157
<PAGE> 6
(t) Record Holder means the holder of Shares as recorded on the
books of the Corporation as of the close of business on a particular day.
(u) REIT means a real estate investment trust, as defined in
Sections 856-860 of the Code.
(v) REIT Provisions of the Internal Revenue Code means Part II,
Subchapter M of Chapter 1, of the Code, as now enacted or hereafter amended, or
successor statutes, and regulations and rulings promulgated thereunder.
(w) Securities means any stock, shares, voting trust
certificates, bonds, debentures, notes or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise or in general any
instruments commonly known as "securities" or any certificates of interest,
shares or participation in temporary or interim certificates for, receipts for,
guarantee of, or warrants, options or rights to subscribe to, purchase or
acquire any of the foregoing.
(x) Shares means the shares of beneficial interest of the
designated class of Shares of the Corporation as described in Section 4.1 of the
Certificate, and, if no class is designated, all Shares of the Corporation
outstanding at the designated time.
(y) Shareholders means, as of any particular time, all holders
of record of outstanding Shares of the designated class of Shares (or series
thereof) of the Corporation at such time, and, if no class is designated, all
holders of record of all outstanding Shares of the Corporation.
(z) Sponsor means any Person directly or indirectly instrumental
in organizing, wholly or in part, the Corporation, or any Person who will manage
or participate in the management of the Corporation, and any Affiliate of any
such Person. Sponsor does not include wholly independent third parties, such as
attorneys, accountants and underwriters whose only compensation is for
professional services rendered in connection with the offering of Shares.
ARTICLE II - DIRECTORS
2.1. NUMBER, TERM OF OFFICE AND QUALIFICATIONS OF DIRECTORS.
There shall be no less than three (3) nor more than seven (7) Directors, until
changed by amendment of the Certificate duly adopted amending this Article II.
Each Director shall hold office until the expiration of his term and until the
election and qualification of his successor. The directors shall be divided into
three classes with Class One consisting of two directors, Class Two consisting
of two directors, and Class Three consisting of one director. The term of office
of Class One directors shall expire at the first, the term of office of the
Class Two directors shall expire at the second, and the term of office of the
Class Three director shall expire at the third annual meeting of shareholders
held after the first election of directors in classes. At the first meeting of
shareholders at which directors are elected, directors shall be elected in
classes as set forth herein, with the directors in each class to be determined
as provided in connection with that election. Each director shall serve until
the end of the term for which elected and until a successor has been elected and
qualified. Notwithstanding the foregoing, and except as otherwise required by
law, whenever the holders of any one or more classes or series of outstanding
shares shall have the right, voting separately as a class or series, to elect
one or more directors of the Corporation, the terms of the director or directors
elected by those holders shall expire at the next succeeding Annual Meeting of
Shareholders.
2.2 VACANCIES. Vacancies and newly-created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the Directors then in office, though less than a quorum, or by
a sole remaining director, and the directors so chosen shall hold office until
the next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced.
2.3. NOMINATION OF DIRECTORS. Nominations for the election of
Directors when a Director is removed or withdraws may be made by the Board of
Directors or by any Shareholder entitled to vote in the election of Directors
generally holding ten percent (10%) or more of the Shares outstanding; provided,
however, any such Shareholder entitled to vote in the election of Directors
generally may nominate one or more Persons for election as Directors at a
meeting only if written notice of such Shareholder's intent to make such
nomination or nominations has been given, by personal delivery,
158
<PAGE> 7
by registered mail, or by telegraphic or other facsimile transmission, and
actually received by the Secretary of the Corporation not less than fifty (50)
days in advance of such meeting or the close of business of the tenth (10th) day
following the date on which public disclosure of the date of the meeting is
first made to Shareholders, whichever is later. Each such notice shall set
forth: (a) the name and address of the Shareholder who intends to make the
nomination and of the Person or Persons to be nominated; (b) a representation
that the Shareholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to nominate the Person or Persons specified in the notice; (c) a
description of all arrangements or understandings between the Shareholder and
each nominee and any other Person or Persons (naming such Person or Persons)
pursuant to which the nomination or nominations are to be made by the
Shareholder; (d) such other information regarding each nominee proposed by such
Shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities Exchange Act of 1934, as amended,
had the nominee been nominated, or intended to be nominated, by the Board of
Directors; and (e) the consent of each nominee to serve as a Director if so
elected. The Chairman of the meeting may refuse to acknowledge the nomination of
any Person not made in compliance with the foregoing procedure.
2.4. PLACE OF MEETINGS. Meetings of the Board of Directors may
be held at any place within or outside the jurisdiction of incorporation that
has been designated from time to time by resolution of the Board of Directors.
In the absence of such a designation, regular meetings shall be held at the
principal executive offices of the Corporation.
2.5. MEETINGS BY TELEPHONE. Unless otherwise restricted by the
Certificate or these Bylaws, members of the Board of Directors, or any committee
designated by the Board of Directors, may participate in a meeting of the Board
of Directors, or any committee, by means of conference telephone or similar
communications equipment by means of which all Persons who participate in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
2.6. ORGANIZATIONAL MEETING. Immediately following each Annual
Meeting of Shareholders, the Board of Directors shall hold a regular meeting for
the purpose of organization, any desired election of officers, and the
transaction of any other business. Notice of the meeting is hereby dispensed
with.
2.7. OTHER REGULAR MEETINGS. Other regular meetings of the Board
of Directors may be held without call or notice at such times as shall from time
to time be determined by the Board. Notice of all such meetings of the Board is
hereby dispensed with.
2.8. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called at any time, and for any purpose, by the Chairman of the
Board, the President, any Vice President, the Secretary or any two directors.
Notice of the time and place of special meetings shall be
delivered personally or by telephone or facsimile transmission to each Director
or sent by first-class mail or telegram, charges prepaid, addressed to each
Director at that Director's address as it is shown on the records of the
Corporation. In case the notice is mailed, it shall be deposited in the United
States mail at least four (4) days before the time of the holding of the
meeting. In case the notice is delivered personally, or by telephone, facsimile
transmission or telegram, it shall be delivered personally or by telephone,
facsimile transmission or to the telegraph company at least twenty-four (24)
hours before the time of the holding of the meeting. Any oral notice given
personally or by telephone may be communicated either to the Director or to a
Person at the office of the Director, who the Person giving the notice has
reason to believe will promptly communicate it to the Director. The notice need
not specify the purpose of the meeting nor the place if the meeting is to be
held at the principal executive offices of the Corporation.
2.9. QUORUM. At all meetings of the Board of Directors, a
majority of the authorized number of Directors shall constitute a quorum for the
transaction of business, and the act of a majority of the Directors present at
any meeting at which there is a quorum shall be the act of the Board of
Directors, except as may be otherwise specifically provided by statute or by the
Certificate. If a quorum shall not be present at a meeting of the Board of
Directors, the Directors present thereat may adjourn the meeting from time to
time, without notice, other than announcement at the meeting, until a quorum
shall be present.
159
<PAGE> 8
2.10. ADJOURNMENT AND NOTICE THEREOF. A majority of the
Directors present, whether or not constituting a quorum, may adjourn any meeting
to another time or place.
Notice of the time and place of holding an adjourned meeting
need not be given to absent Directors if the time and place are fixed at the
meeting adjourned.
2.11. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate or these Bylaws, any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
2.12. REMOVAL. Unless otherwise restricted by the Certificate or
these Bylaws, any director or the entire Board of Directors may be removed, with
or without cause, by the holder of a majority of Shares entitled to vote at an
election of Directors.
2.13. COMMITTEES OF THE BOARD. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more of the Directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee who may replace any absent or disqualified
member at any meeting of the committee. In the absence of disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it, but no such committee shall have the power or authority in reference
to amending the Certificate, adopting an agreement of merger or consolidation,
recommending to the Shareholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
Shareholders a dissolution of the Corporation or a revocation of a dissolution,
or amending the Bylaws of the Corporation; and, unless the resolution or the
Certificate expressly so provide, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board of Directors. Each committee
shall keep regular minutes of its meetings and report the same to the Board of
Directors when required.
2.14. DIRECTORS' COMPENSATION. Directors who are not officers or
Shareholders of the Advisory Company shall receive reasonable compensation for
their services as determined by the Board of Directors from time to time. Such
compensation may be set from time to time by resolution of the Board of
Directors. Directors shall be reimbursed for expenses incurred in attending
meetings of the Board of Directors.
ARTICLE III - DIRECTORS' POWERS
3.1. POWER AND AUTHORITY OF DIRECTORS. The Directors, subject
only to the specific limitations contained in the Certificate, the Act or these
Bylaws, shall have, without further or other authorization, and free from any
power or control on the part of the Shareholders, full, absolute and exclusive
power, control and authority over the business and affairs of the Corporation,
and may do all such acts and things as in their sole judgment and discretion are
necessary for or incidental to or desirable for the carrying out of any of the
purposes of the Corporation or the conducting of the business of the
Corporation. Any determination made in good faith by the Directors of the
purposes of the Corporation or the existence of any power or authority hereunder
shall be conclusive. In construing the provisions of the Certificate, the Act or
these Bylaws, presumption shall be in favor of the grant of powers and authority
to the Directors. The enumeration of any specific power or authority herein
shall not be construed as limiting the general powers or authority or any other
specified power or authority conferred herein upon Directors.
160
<PAGE> 9
3.2. SPECIFIC POWERS AND AUTHORITIES. Subject only to the
express limitations contained in the Certificate, the Act or these Bylaws, and
in addition to any powers and authorities conferred by the Certificate, the Act
or these Bylaws, or which the Directors may have by virtue of any present or
future statute or rule or law, the Directors without any action or consent by
the Shareholders shall have and may exercise at any time and from time to time
the following powers and authorities which may or may not be exercised by them
in their sole judgment and discretion and in such manner and upon such terms and
conditions as they may from time to time deem proper:
(a) To retain, invest and reinvest the capital or other funds of
the Corporation in real or personal property of any kind (including, without
limitation, Home Equity Loans and Securities), and to increase the capital of
the Corporation at any time by the issuance of additional Shares for such
consideration as they deem appropriate;
(b) For such consideration as they deem proper, to invest in,
purchase or otherwise acquire for cash or other property or through the issuance
of Shares or through the issuance of notes, debentures, bonds or other
obligations of the Corporation and hold for investment real, personal or mixed,
tangible or intangible, property of any kind wherever located in the world,
including without limitation (i) the entire or any participating interest in
rents, lease payments or other income from, or the entire or any participating
interest in the profits from, or the entire or any participating interest in,
the equity or ownership of Home Equity Loans or other interests in real
property; (ii) in connection with any such investment, purchase or acquisition,
a share of interest or profits from Home Equity Loans or rents, lease payments
or other gross income from, or a share of the profits from, or a share in the
equity, ownership or other interest in real property, either directly (through
the securitization of Home Equity Loans) or through joint venture, general or
limited partnerships, or other lawful combinations or associations with
independent third parties or with the Advisor or its Affiliates or a combination
of such Persons; and (iii) Securities of every nature;
(c) To sell, rent, lease, hire, exchange, release, partition,
assign, mortgage, pledge, hypothecate, grant security interests in, encumber,
negotiate, convey, transfer or otherwise dispose of any and all of the
Corporation's assets by deeds, trust deeds, assignments, bills of sale,
transfers, leases, mortgages, financing statements, security agreements and
other instruments for any of such purposes executed and delivered for and on
behalf of the Corporation or the Directors by one or more of the Directors or by
a duly authorized officer, employee, agent or any nominee of the Corporation;
(d) To issue, subject to the provisions of the Certificate,
Shares, bonds, debentures, notes or other evidences of indebtedness, which may
(i) be secured or unsecured, (ii) be subordinated to any indebtedness of the
Corporation, (iii) be convertible into Shares (or any class or series thereof),
and (iv) include options, warrants and rights to subscribe to, purchase or
acquire any of the foregoing, all without vote of or other action by the
Shareholders, to such Person for such case, property or other consideration
(including Securities issued or created by, or interests in any Person) at such
time or times and on such terms as the Directors may deem advisable and to list
any of the foregoing Securities issued by the Corporation on any securities
exchange and to purchase or otherwise acquire, hold, cancel, reissue, sell and
transfer any of such Securities;
(e) To enter into leases, contracts, obligations, and other
agreements for a term extending beyond the term of office of the Directors or
for a lesser term;
(f) To borrow money and give negotiable or non-negotiable
instruments therefor; to guarantee, indemnify or act as surety with respect to
payment or performance of obligations of third parties; to enter into other
obligations on behalf of the Corporation; and to assign, convey, transfer,
mortgage, subordinate, pledge, grant security interests in, encumber or
hypothecate the Corporation's assets to secure any of the foregoing;
(g) To lend money through Home Equity Loans or otherwise, and
whether secured or unsecured;
(h) To create reserve funds for any purpose;
(i) To incur any pay out of the Corporation's assets any charges
or expenses, and disburse any funds of the Corporation, which charges, expenses
or disbursements are, in the opinion of the Directors, necessary for or
incidental to or desirable for, and are incurred in connection with, the
carrying out of any of the purposes of the Corporation or the conducting of the
business of the Corporation, including without limitation taxes and other
governmental levies, charges and
161
<PAGE> 10
assessments of whatever kind or nature, imposed upon or against the Directors in
connection with the Corporation or the Corporation's assets or upon or against
the Corporation's assets or any part thereof, and for any of the purposes
herein;
(j) To deposit funds or Securities held by the Corporation in
banks, trust companies, savings and loan associations and other depositories,
whether or not such deposits will draw interest, the same to be subject to
withdrawal on such terms and in such manner and by such Person or Persons
(including any one or more Directors, officers, agents or representatives) as
the Directors may determine;
(k) To possess and exercise all the rights, powers and
privileges appertaining to the ownership of all or any interests in Mortgages,
Home Equity Loans, or Securities issued or created by, any Person, forming part
of the Corporation's assets, to the same extent that an individual might, and,
without limiting the generality of the foregoing, to vote or give any consent,
request or notice, or waive any notice, either in person or by proxy or power of
attorney, with or without power of substitution, to one or more Persons, which
proxies and powers of attorney may be for meetings or action generally or for
any particular meeting or action, and may include the exercise of discretionary
powers;
(l) To enter into joint ventures, general or limited
partnerships and any other lawful combinations or associations with independent
third parties or with the Advisor or its Affiliates or a combination of such
Persons;
(m) To elect, appoint, engage or employ such officers for the
Corporation as the Directors may determine, who may be removed or discharged at
the discretion of the Directors, such officers to have such powers and duties,
and to serve such terms and at such compensation, as may be prescribed by the
Directors or by these Bylaws; to engage or employ any Persons (including any
Director or officer and any Person with which any Director or officer is
directly or indirectly connected) as agents, representatives, employees, or
independent contractors (including, without limitation, real estate advisors,
loan servicing agents, investment advisors, transfer agents, registrars,
underwriters, accountants, attorneys at law, real estate agents, managers,
appraisers, brokers, architects, engineers, construction managers, general
contractors or compensation managers, general contractors or otherwise) in one
or more capacities, and to pay compensation from the Corporation for services in
as many capacities as such Person may be so engaged or employed; and, except as
prohibited by law, to delegate any of the powers and duties of the Directors to
any one or more Directors, advisors, agents, representatives, officers,
employees, independent contractors or other Persons;
(n) To determine from time to time, the value of all or any part
of the Corporation's assets and of any services, Securities, assets, or other
consideration to be furnished to or acquired by the Corporation, and from time
to time to revalue all or any part of the Corporation's assets in accordance
with such appraisals or other information as are, in the Director's sole
judgment, necessary and/or satisfactory;
(o) To collect, sue for, and receive all sums of money or other
assets coming due to the Corporation, and to engage in, intervene in, prosecute,
join, defend, compound, compromise, abandon or adjust, by arbitration or
otherwise, any actions, suits, proceedings, disputes, claims, controversies,
demands or other litigation relating to the Corporation, the Corporation's
assets or the Corporation's affairs, to enter into agreements therefor, whether
or not any suit is commenced or claim accrued or asserted and, in advance of any
controversy, to enter into agreements regarding arbitration, adjudication or
settlement thereof;
(p) To renew, modify, release, compromise, extend, consolidate,
or cancel, in whole or in part, any obligation to or of the Corporation;
(q) To purchase and pay for out of the Corporation's assets
insurance contracts and policies insuring the Corporation's assets against any
and all risks and insuring the Corporation and/or any or all of the Directors,
the Shareholders, officers, employees, agents, investment advisors or
independent contractors of the Corporation against any and all claims and
liabilities of every nature asserted by any Person arising by reason of any
action alleged to have been taken or omitted by the Corporation or by any such
person as Director, Shareholder, officer, employee, agent, investment advisor or
independent contractor, whether or not the Corporation would have the power to
indemnify such person against such liability;
162
<PAGE> 11
(r) To cause legal title to any of the Corporation's assets to
be held by and/or in the name of the Directors, or except as prohibited by law,
by and/or in the name of the Corporation or one or more of the Directors or any
other Person, on such terms, in such manner, with such powers in such Person as
the Directors may determine, and with or without disclosure that the Corporation
or Directors are interested therein;
(s) To adopt a fiscal year for the Corporation, and from time to
time to change such fiscal year;
(t) To adopt and use a seal (but the use of seal shall not be
required for the execution of instruments or obligations of the Corporation);
(u) To make, perform, and carry out, or cancel and rescind,
contracts of every kind for any lawful purpose without limit as to amount, with
any Person, firm, trust, association, corporation, municipality, country,
parish, state, territory, government or other municipal or governmental
subdivision. These contracts shall be for such duration and upon such terms as
the Directors in their sole discretion shall determine; and
(v) To do all other such acts and things as are incident to the
foregoing, and to exercise all powers which are necessary or useful to carry on
the business of the Corporation, to promote any of the purposes for which the
Corporation is formed, and to carry out the provisions of the Certificate and
these Bylaws.
3.3. ADDITIONAL POWERS. The Directors shall additionally have
and exercise all the powers conferred by the laws of Delaware upon corporations
or real estate investment trusts formed under such laws, insofar as such laws
are not in conflict with the provisions of the Certificate and these Bylaws.
ARTICLE IV - EMPLOYMENT OF ADVISOR
4.1. EMPLOYMENT OF ADVISOR. The Directors are responsible for
the general policies of the Corporation and for such general supervision of the
business of the Corporation conducted by all officers, agents, employees,
advisors, managers or independent contractors of the Corporation as may be
necessary to insure that such business conforms to the provisions of the
Certificate and these Bylaws. However, the Directors shall not be required
personally to conduct all the business of the Corporation, and consistent with
their ultimate responsibility as stated above, the Directors shall have the
power to appoint, employ or contract with any Person (including one or more of
themselves or any corporation, partnership, or trust in which one or more of
them may be directors, officers, stockholders, partners or Directors) as the
Directors may deem necessary or proper for the transaction of the business of
the Corporation. The Directors may, therefore, employ or contract with such
Person (herein referred to as the "Advisor" but may also be referred to as
"Manager"), and the Directors may grant or delegate such authority to the
Advisor as the Directors may in their sole discretion deem necessary or
desirable without regard to whether such authority is normally granted or
delegated by Directors. Capital Alliance Advisors, Inc., a California
corporation, shall be the Advisor or Manager to the Corporation pursuant to the
agreement provided for herein.
The Directors (subject to the provisions of Sections 4.2) shall
have the power to determine the terms and compensation of the Advisor or any
other Person whom they may employ or with whom they may contract. The Directors
may exercise broad discretion in allowing the Advisor to administer and regulate
the operations of the Corporation, to act as agent for the Corporation, to
execute documents on behalf of the Directors, and to make executive decisions
which conform to general policies and general principles previously established
by the Directors.
4.2. TERM. The Directors shall not enter into any advisory or
management contract with the Advisor unless such contract has a term (other than
the initial term) of no more than two (2) years and provides for bi-annual
renewal or extension thereafter. Extensions of the advisory contract shall be
subject to the approval of a Majority in Interest of the Shareholders. The term
of the initial advisory contract shall expire on December 31, 1998. The advisory
or management contract with the Advisor may be terminated by the Advisor upon
120 days' prior written notice, or by the Corporation without cause by action of
the Directors, subject to approval of such action by the Directors by vote or
consent of a Majority in Interest of the Shareholders of the Corporation and
upon 120 days' prior written notice. The advisory or management
163
<PAGE> 12
contract shall also require the Advisor to cooperate with the Corporation to
provide an orderly management transition after any termination.
4.3. OTHER ACTIVITIES OF ADVISOR. The Advisor shall not be
required to administer the investment activities of the Corporation as its sole
and exclusive function and may have other business interests and may engage in
other activities similar or in addition to those relating to the Corporation,
including the rendering of services and advice to other Persons (including other
real estate investment trusts) and the management of other investments
(including investments of the Advisor and its Affiliates). The Directors may
request the Advisor to engage in, or manage and advise, other activities or
investments which complement the Corporation's investments, including those
conducted through a subsidiary of the Corporation and the Advisor may receive
compensation or commissions therefor from the Corporation, its Affiliates, or
other Persons.
The Advisor shall be required to use its best efforts to present
a continuing and suitable investment program to the Corporation which is
consistent with the investment policies and objectives of the Corporation, but
neither the Advisor nor any Affiliate of the Advisor shall be obligated to
present any particular investment opportunity to the Corporation even if such
opportunity is of a character which, if presented to the Corporation, could be
taken by the Corporation, and, subject to the foregoing, shall be protected in
taking for its own account or recommending to others, such particular investment
opportunity. The Advisor or its Affiliates, or a combination thereof, may enter
into joint ventures or other lawful combinations or associations with the
Corporation in connection with the acquisition and ownership of Home Equity
Loans, mortgage loans or other real or personal property investments.
Upon request of any Director, the Advisor and any Person who
controls, is controlled by, or is under common control with the Advisor, shall
from time to time promptly furnish the Directors with information on a
confidential basis as to any investments within the Corporation's investment
policies made by the Advisor or such other Person for its own account.
ARTICLE V - INVESTMENT POLICY
5.1. GENERAL STATEMENT OF POLICY. The Directors intend, to the
extent funds are not fully invested in Home Equity Loans or other mortgage loans
or investments contemplated herein to invest the Corporation's assets in
investments such as: (i) short-term government securities, certificates of
deposit and bank deposits, (ii) Securities of government agencies, (iii)
bankers' acceptances, (iv) certificates of deposit, (v) deposits in commercial
banks, (vi) participation in pools of mortgages or bonds and notes such as
Federal Home Loan Mortgage Corporation participation sale certificates ("Freddie
Mac PC's"), Government National Mortgage Association modified pass-through
certificates ("Ginnie Mae's"), and/or (vii) other short-term investment
Securities and money market funds. The Directors intend to invest, directly or
indirectly, primarily in the ownership or other interests in Home Equity Loans.
The Directors may also participate or invest in investments with other
investors, including investors (which may include the Advisor or its Affiliates)
having investment policies similar to those of the Corporation, on the same or
different terms, and the Advisor may act as advisor to such other investors,
including investors who have the same or similar investment policies.
It is the intention and policy of the Directors that the Capital
Contributions (less reserves and except for interim and other authorized
investments) will be primarily invested, directly or indirectly (through a
subsidiary or otherwise), in Home Equity Loans and other mortgage loans which
consist of loans secured by trust deeds on single family residential properties
and two-to-four unit residential properties located in the States of California,
Oregon, Washington, Nevada, Utah and Colorado. It is also the intention and
policy of the Directors that the Combined Loan-to-Value ratio of the amount of
the Home Equity Loan and of the lien of any other indebtedness to which the Home
Equity Loan is subordinate shall not exceed seventy-five percent (75%) of the
Appraised Value of the subject property securing the Home Equity Loan (provided
that such limitation shall not apply to residential mortgage loans originated or
acquired by a subsidiary of the Corporation). The Corporation will not invest in
loans secured primarily by commercial, agricultural or undeveloped or raw land
or properties although such properties may be taken as additional security for
Home Equity Loans, and up to twenty-five percent (25%) of the appraised value of
such properties may be considered in the Loan-to-Value computations for a Home
Equity Loan.
164
<PAGE> 13
The Corporation will require title insurance on all Home Equity
Loans, and will require standard hazard and casualty insurance for the benefit
of the Corporation on all property securing a Home Equity Loan.
Subject to the investment restrictions in Section 5.3, the
Directors may alter any or all of the above-described investment policies and
may take such actions in connection therewith if they should determine such
change or actions to be in the best interest of the Corporation and its
Shareholders. Subject to the preceding sentence, the Directors shall endeavor to
invest the Corporation's assets in accordance with the investment policies set
forth in this Article V, but the failure so to invest its assets shall not
affect the validity of any investment made or action taken by the Directors.
The general purpose of the Corporation, at such time as it
elects to qualify as a REIT, will be to make investments and to seek income
which qualify under the REIT Provisions of the Internal Revenue Code provided,
however, that no Director, officer, employee, agent, investment advisor or
independent contractor of the Corporation shall be liable for any act or
omission resulting in the loss of tax benefits under the Internal Revenue Code,
except for that arising from his own bad faith, willful misconduct, gross
negligence or reckless disregard of his duties.
5.2. INVESTED ASSETS. To the extent that the Corporation has
assets not otherwise invested in accordance with Section 5.1, the Directors may
invest such assets in:
(a) obligations of, or guaranteed by, the United States
Government or any agencies or political subdivisions thereof (and hedge
investments with respect to such obligations);
(b) obligations of, or guaranteed by, any state, territory or
possession of the United States of America or any agencies or political
subdivisions thereof;
(c) securities of a subsidiary of the Corporation permitted by
the REIT Provisions of the Code without affecting the Corporation's status as a
REIT; and
(d) evidences of deposits in, or obligations of, banking
institutions, state and federal savings and loan associations and savings
institutions which are members of the Federal Deposit Insurance Corporation or
of the Federal Home Loan Bank System.
5.3. RESTRICTIONS. The Corporation shall not:
(a) invest in any foreign currency (except as necessary for the
offer of the Corporation's securities in a foreign state), bullion, commodities,
or commodities futures contracts (which shall not be deemed to include
investments under Section 5.2(a), above);
(b) invest in contracts for the sale of real estate;
(c) engage in any short sale (except in connection with a long
sale);
(d) invest in Mortgage loans on commercial or agricultural
property or on undeveloped land or raw land; provided that a security interest
in such properties may be taken as additional security for a Home Equity Loan
and up to twenty-five percent (25%) of the appraised value of such property may
be considered in determining the combined loan-to-value ratio of such Home
Equity Loan so long as the residential property securing the Home Equity Loan is
the primary security for such loan;
(e) other than in connection with a public offering of the
Corporation's Shares, grant options or warrants to purchase Shares at exercise
prices less than their fair market value or for a noncash consideration which
has a market value less than the value of the subject Shares on the date of
grant of the options or warrants, unless such options or warrants are issued as
part of a financing arrangement or a corporate compensation, pension or
profit-sharing plan. In no event shall options or warrants be exercisable later
than five (5) years from any date of grant, and the aggregate number of Shares
issuable at any time by exercise of outstanding options or warrants shall not
exceed an amount equal to 10% of the
165
<PAGE> 14
outstanding Shares of any class on the date of grant plus options granted to
underwriters in connection with a public offering of the Corporation's Shares;
(f) issue "redeemable securities" as defined in Section 2(a)(32)
of the Investment Company Act of 1940;
(g) engage in trading as compared with investment activities
(except to the extent permitted by the REIT Provisions of the Code without
affecting the Corporation's status as a REIT), or engage in the business of
underwriting or agency distribution of Securities issued by others;
(h) hold property primarily for sale to customers in the
ordinary course of the trade or business of the Corporation or any subsidiary
thereof (except to the extent permitted by the REIT Provisions of the Code
without affecting the Corporation's status as a REIT), but this prohibition
shall not be construed to deprive the Corporation of the power to sell any Home
Equity Loan or to sell any property which it owns at any time by reason of
foreclosure of a Home Equity Loan or to conduct a mortgage banking business
through a subsidiary corporation (in which it has a controlling economic
interest) to the extent permitted by the REIT Provisions of the Code without
affecting the Corporation's status as a REIT;
(i) make any loan to the Advisor of the Corporation;
(j) engage in any practice or transaction wherein the Advisor,
Directors or any Affiliate receives any rebate, kick-back or other reciprocal
payments in the course of their dealings with the Corporation;
(k) borrow upon the security of the Corporation's portfolio of
Home Equity Loans in an amount in excess of twenty percent (20%) of the total
Net Capital Contributions of the Corporation; and
(l) other than in connection with the termination and
liquidation of the Corporation, sell, convey, assign, transfer or otherwise
dispose of fifty percent (50%) or more of the Corporation's assets in one or
more related transactions with a single or related parties, without the approval
of a Majority-in-Interest of the Shareholders, voting by class.
ARTICLE VI - OFFICERS
6.1. OFFICERS. The officers of the Corporation shall be a
President, a Secretary and a Treasurer. The Corporation may also have, at the
discretion of the Board of Directors, a Chairman of the Board, a Vice Chairman
of the Board, one or more Executive Vice Presidents, one or more Senior Vice
Presidents, one or more Vice Presidents, one or more Assistant Secretaries, one
or more Assistant Treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 6.3 hereof. Any number of offices may
be held by the same Person.
6.2. ELECTION OF OFFICERS. The officers of the Corporation,
except such officers as may be appointed in accordance with the provisions of
Sections 6.3 or 6.5 hereof, shall be chosen by the Board of Directors, and each
shall serve at the pleasure of the Board, subject to the rights, if any, of an
officer under any contract of employment.
6.3. APPOINTED OFFICERS. The Board of Directors may appoint, and
may empower the President to appoint, such other officers as the business of the
Corporation may require, each of whom shall hold office for such period, have
such authority and perform such duties as are provided in the Bylaws or as the
Board of Directors may from time to time determine.
6.4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights,
if any, of any officer under any contract of employment, any officer may be
removed, either with out without cause, by a majority of the Board of Directors,
at any regular or special meeting of the Board or, except in case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to
the Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in
166
<PAGE> 15
that notice, the acceptance of the resignation shall not be necessary to make it
effective. Any resignation is without prejudice to the rights, if any, of the
Corporation under any contract to which the officer is a party.
6.5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these Bylaws for regular appointments to that
office.
6.6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such
an officer be elected, may, if present, preside at meetings of the Board of
Directors or delegate such authority to the President. The Chairman of the Board
shall exercise and perform such other powers and duties as may be from time to
time assigned to him by the Board of Directors or as prescribed by these Bylaws.
6.7. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board
of Directors, if such an officer be elected, shall exercise and perform such
duties as may be assigned to him by the Board of Directors or as prescribed by
these Bylaws.
6.8. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board of Directors to the Chairman of the Board, if there be
such an officer, the President shall be the chief executive officer of the
Corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction, and control of the business and the officers of
the Corporation. He shall preside at all meetings of the Shareholders and,
pursuant to appropriate delegation by the Chairman of the Board, at all meetings
of the Board of Directors. He shall have the general powers and duties of
management usually vested in the office of the President of a Corporation, and
shall have such other powers and duties as may be prescribed by the Board of
Directors or by these Bylaws.
6.9. EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND VICE
PRESIDENTS. The Executive Vice Presidents, Senior Vice Presidents and the Vice
Presidents, if such officers be elected, shall have such powers and perform such
duties as form time to time may be prescribed for them respectively by the Board
of Directors or by these Bylaws, and by the President or the Chairman of the
Board.
6.10. SECRETARY. The Secretary shall keep or cause to be kept,
at the principal executive office or such other place as the Board of Directors
may direct, a book of minutes of all meetings and actions of directors,
committees of directors, and Shareholders, with the time and place of holding,
whether regular or special, and, if special, how authorized, the notice given,
the names of those present at directors' meetings or committee meetings, the
number of Shares present or represented at Shareholders' meetings, and the
proceedings.
The Secretary shall keep, or cause to be kept, at the principal
executive office, a share register, or a duplicate share register, showing the
names of all Shareholders and their addresses, the number and class of shares
held by each, the number and date of certificates issued for the same, and the
number and date of cancellation of every certificate surrendered for
cancellation.
The Secretary shall give, or cause to be given, notice of all
meetings of the Shareholders and of the Board of Directors required by these
Bylaws or Bylaw to be given; shall keep the seal of the Corporation, if one be
adopted, in safe custody; and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or by these Bylaws.
6.11. TREASURER. The Treasurer shall keep and maintain, or cause
to be kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the Corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and Shares. The books of account shall, at all reasonable
times, be open to inspection by any Director.
The Treasurer shall deposit all monies and other valuables in
the name and to the credit of the Corporation with such depositories as may be
designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, shall render to the
President and the Directors, whenever they request it, an
167
<PAGE> 16
account of all of the Treasurer's transactions as Chief Financial Officer and of
the financial condition of the Corporation, and shall have other powers and
perform such other duties as may be prescribed by the Board of Directors or by
these Bylaws.
ARTICLE VII - SHAREHOLDERS
7.1. PLACE OF MEETINGS. All annual and all other meetings of
Shareholders shall be held at the principal office of the Corporation, or at any
other place within or without the State of Delaware which may be designated
either by the Board of Directors pursuant to authority hereinafter granted to
said board, or by the written consent of all Shareholders entitled to vote
thereat, given either before of after the meeting and filed with the Secretary
of the Corporation.
7.2. ANNUAL MEETINGS.
(a) Time of Holding. The Annual Meetings of Shareholders shall
be held on the first Wednesday in June of each year at 10:00 o'clock a.m.;
provided, however, that should said day fall upon a legal holiday, then any such
Annual Meeting of Shareholders shall be held at the same time and place or the
next day thereafter ensuing which is not a legal holiday, and, provided,
further, that the Directors may designate a different time and place for the
holding of such meeting if it so decides. At such meetings Directors shall be
elected, reports of the affairs of the Corporation shall be considered, and any
other business may be transacted which is within the powers of the Shareholders.
(b) Notice. Written notice of each Annual Meeting shall be given
to each Shareholder of record entitled to vote, either personally or by mail or
other means of written communication, charges prepaid, addressed to such
Shareholder at his address appearing on the books of the Corporation or given by
him to the Corporation for the purpose of notice. If a Shareholder gives no
address, notice shall be deemed to have been given if sent by mail or other
means of written communication addressed to the place where the principal office
of the Corporation is situated or if published at least once in some newspaper
of general circulation in the county in which said office is located. All such
notices shall be sent to each Shareholder entitled thereto not less that ten
(10) days and not more than sixty (60) days before each Annual Meeting, shall
specify the place, the day and the hour of each such meeting and those matters
which the Board of Directors, at the time of the notice, intends to present for
action by the Shareholders.
(c) Advance Notice of Shareholder Proposals. No proposal by any
Shareholders other than two or more members of the Board of Directors, the
Chairman of the Board, or the President shall be submitted for approval of the
Shareholders at any Annual Meeting of the Shareholders, unless the Shareholder
advancing such proposal shall have given timely notice thereof to the Chairman
of the Board, the President, or the Secretary of the Corporation. To be timely,
such notice shall be delivered or mailed by registered mail or by telegraphic or
other facsimile transmission, and actually received not less than fifty (50)
days prior to the meeting or ten (10) days after the date on which public
disclosure of the date of the meeting is first made to Shareholders, whichever
is later. Such notice shall set forth as to each matter such Shareholder
proposes to bring before the meeting (i) a reasonably detailed description of
the business desired to be brought before the meeting and the reasons for
conducting such business at the meeting, (ii) the name and the business and
residence address of the Shareholder proposing such business, (iii) the class
and number of Shares of stock of the Corporation which are owned by such
Shareholder, (iv) any material interest of such Shareholder in such business;
and (v) any other information that is required to be provided by such
Shareholder pursuant to the Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder. Notwithstanding anything in these Bylaws to
the contrary, no business proposed by any Shareholders other than two or more
members of the Board of Directors, the Chairman of the Board or the President
shall be conducted at an Annual Meeting of Shareholders except in accordance
with the procedures set forth in this subsection 7.2(c). The Chairman of the
meeting shall, if the facts warrant, determine and declare at the meeting that
business was not properly brought before the meeting and in accordance with the
provisions of these Bylaws, and if he should so determine, he shall so declare
at the meeting that any such business not properly brought before the meeting
shall not be transacted.
168
<PAGE> 17
7.3. SPECIAL MEETINGS AND NOTICE THEREOF.
(a) How Called. Special meetings of the Shareholders
for any proper purpose whatsoever may be called at any time by the President or
by two Directors or the Chairman of the Board or by Shareholders holding an
aggregate of not less than 10% of the outstanding Shares of the Corporation
("10% Shareholders"). A special meeting may be called by any 10% Shareholder(s)
only upon written request delivered or mailed by registered mail or by
telegraphic or other facsimile transmission to the Chairman of the Board, the
President or the Secretary of the Corporation, which request contains a
reasonably detailed description of the business desired to be brought before the
meeting and the reasons for conducting such business at the meeting. If a
special meeting of Shareholders is called upon the request of any 10%
Shareholder(s), then the Chairman of the Board shall cause notice thereof to be
promptly given to the Shareholders entitled to vote in accordance with the
provisions of this Article VII. Any special meeting will be held on the date and
at the time designated by the Chairman of the Board or the Board of Directors,
which shall be not less than ten (10) nor more than sixty (60) days after the
giving of notice thereof. If the notice is not given with twenty (20) days after
receipt of the request, the Shareholders requesting the meeting may give the
notice. Nothing contained in this Section 7.3 shall be construed as limiting,
fixing or affecting the time when a meeting of Shareholders called by action of
the Chairman of the Board, the President or two or more members of the Board of
Directors may be held or the nature of the business that may be transacted at
such meeting.
(b) Notice. Except in special cases where other
express provision is made by statute, notices of special meetings shall be given
in the same manner as for Annual Meetings of Shareholders. Notices of any
special meeting shall specify, in addition to the place, the day and the hour of
such meeting, the general nature of the business to be transacted, and no other
business may in fact be transacted. In the case of any special meeting called at
the request of any 10% Shareholder(s), the only business which may be proposed
by such 10% Shareholder in the notice of the meeting, or proposed by such 10%
Shareholder(s) to be transacted at the meeting, shall be the business specified
in such 10% Shareholder(s)' request for a special meeting. In the case of any
special meeting called at the request of any 10% Shareholder(s), however, the
President, any two Directors or the Chairman of the Board may bring business
before the meeting which is in addition to the business proposed by the 10%
Shareholder(s), which additional business may be proposed by the President, any
two Directors or the Chairman of the Board in the notice of the Meeting.
(c) Conduct of Meetings. The Chairman of the Board of
Directors (or such other person as may be designated by the Board of Directors
to chair any annual or special meeting of the Shareholders) (the "Chairman")
shall be authorized to determine or to establish procedures governing the
organization of each annual or special meeting of Shareholders, the order of
business to be considered at such meetings and all matters relating to the
conduct of such meetings, including, without limitation, admission to the
meetings and admission procedures, the persons entitled to address the meetings,
time limits for speaking, question and answer periods, the permissibility or
impermissibility of utilizing court reporting equipment, tape recorders, cameras
or other mechanical devices, the opening and closing of the polls, and, subject
to Section 7.5, the inspection and counting of proxies and ballots. Meetings
shall be conducted in a manner designed to accomplish the business of the
meetings in a prompt and orderly fashion, without distraction and disruption.
Roberts' Rules of Order or any other manual of parliamentary procedure shall
have no applicability to the conduct of such Shareholders' meetings unless
otherwise determined by the Chairman of the Board.
7.4 ADJOURNED MEETINGS AND NOTICE THEREOF. Any
Shareholders' meeting, annual or special, whether or not a quorum is present,
may be adjourned from time to time by the Chairman of the Board or by the vote
of the majority of the Shares, the holders of which are either present in person
or represented by proxy thereat, but in the absence of a quorum no other
business may be transacted at such meeting.
When any other Shareholders' meeting, either annual or
special, is adjourned for more than forty-five (45) days or if after the
adjournment a new record date is fixed for the adjourned meeting, notice of the
adjourned meeting shall be given as in the case of a special meeting. Save as
aforesaid, it shall not be necessary to give any notice of an adjournment or of
the business to be transacted at an adjourned meeting other than by announcement
at the meeting at which such adjournment is taken.
7.5. VOTING AT MEETINGS OF SHAREHOLDERS. Subject to
the right of the Board of Directors to provide otherwise, only persons in whose
name Shares entitled to vote standing on the stock records of the Corporation on
the day immediately preceding the day upon which notice of any meeting of
Shareholders is given, as provided in this Article, shall
169
<PAGE> 18
be entitled to notice of and to vote at such meeting, notwithstanding any
transfer of any Shares on the books of the Corporation after such record date;
provided, however, the Board of Directors may in advance fix a record date other
than that otherwise provided for herein, and, provided, further, such record
date shall not be more than sixty (60) days nor less then ten (10) days prior to
such meeting.
Such vote may be via voce or by ballot; provided,
however, that all elections for Directors must be held by ballot upon demand
made by a Shareholder at any election and before the voting begins. The
candidates receiving the highest number of votes up to the number of Directors
to be elected shall be elected.
7.6. QUORUM. The presence in person or by proxy of
persons entitled to vote a majority of the voting Shares at any meeting shall
constitute a quorum for the transaction of business. Except as provided in the
next sentence, the affirmative vote of a majority of the Shares represented and
voting at a duly held meeting at which a quorum is present (which Shares voting
affirmatively also constitute at least a majority of the required quorum), shall
be an act of the Shareholders, unless a vote of a greater number is required
herein, or by the Certificate or the Act. The Shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough Shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least the majority of the Shares required to constitute a quorum.
7.7. ACTION WITHOUT MEETING. Except as elsewhere
provided in the Certificate or in these Bylaws, any action which may be taken at
any annual or special meeting of the Shareholders may be taken without a meeting
and without prior notice, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of all of the outstanding Shares.
Directors may not be elected by written consent except by unanimous written
consent of all Shares entitled to vote for the election of Directors.
Any Shareholder giving a written consent, or the
Shareholder's proxy holders, or a transferee of the Shares or a personal
representative of the Shareholder to their respective proxy holders, may revoke
the consent by a writing received by the Corporation prior to the time that
written consents of the number of Shares required to authorize the proposed
action have been filed with the Secretary of the Corporation, but may not do so
thereafter. Such revocation is effective upon its receipt by the Secretary of
the Corporation.
7.8. PROXIES. Every person entitled to vote or execute
consents shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such person or his duly authorized
agent and filed with the Secretary of the Corporation, provided that no such
proxy shall be valid after the expiration of three (3) years from the date of
its execution unless the person executing it specifies therein the length of
time for which such proxy is to continue in force.
A proxy shall be deemed signed if the Shareholder's
name is placed on the proxy (whether by manual signature, typewriting,
telegraphic transmission or otherwise) by the Shareholder or the Shareholder's
attorney in fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless revoked by the Person
executing it before the vote pursuant to that proxy by (a) a writing delivered
to the Corporation stating that the proxy is revoked, (b) execution of a
subsequent proxy, (c) attendance at the meeting and voting in person, or (d)
transfer of the Shares represented by the proxy to a transferee who becomes a
Shareholder of record prior to the record date established for the vote. Such
validly executed proxy otherwise may be revoked by written notice of the death
or incapacity of the maker of that proxy received by the Corporation before the
vote pursuant to that proxy is counted.
7.9. INSPECTORS OF ELECTION. Before any meeting of
Shareholders, the Board of Directors may appoint any Persons other than nominees
for office to act as inspectors of election at the meeting or its adjournment.
If no inspectors of election are so appointed, the Chairman of the meeting may,
and on the request of any Shareholder or a Shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall not be
less than two. If inspectors are appointed at a meeting on the request of one or
more Shareholders or proxies, the holders of a majority of Shares or their
proxies present at the meeting shall determine the precise number of inspectors
to be appointed. If any person appointed as inspector fails to appear or fails
or refuses to act, the Chairman of the meeting may, and upon the request of any
Shareholder or a Shareholder's proxy shall, appoint a Person to fill that
vacancy.
170
<PAGE> 19
The inspectors shall:
(a) Determine the number of Shares
outstanding and the voting power of each, the Shares represented at the meeting,
the existence of a quorum, and the authenticity, validity, and effect of
proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and
questions in any way arising in connection with the right to vote;
(d) Count and tabulate all votes or
consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to
conduct the election or vote with fairness to all Shareholders.
ARTICLE VIII - MISCELLANEOUS
8.1. RECORD DATES AND CLOSING OF TRANSFER BOOKS. From
time to time the Directors may fix a future date, not exceeding sixty (60) days
preceding the date of any meeting of Shareholders or the date fixed for the
payment of any dividend or distribution or for the allotment of rights or when
any change or conversion or exchange of Shares is to go into effect as the
record date for the determination of the Shareholders entitled to notice of and
to vote at any such meeting or to receive any such dividend or distribution or
any allotment of rights or to exercise the rights with respect to any such
change, conversion or exchange of Shares. If a time is so fixed only
Shareholders of record on the date so fixed shall be entitled to notice of and
to vote at such meeting or to receive such dividend or distribution or allotment
of rights or to exercise such rights, as the case may be, notwithstanding any
transfer of Shares on the books of the Corporation after the record date so
fixed. The Directors may close the books of the Corporation against transfers of
Shares during the whole or any part of the period between the record date and
the date so fixed for the meeting, payment, distribution, allotment, change or
exercise of rights.
8.2. INSPECTION OF CORPORATE RECORDS. The share
register or duplicate share register, the books of account, and the minutes of
the proceedings of the Shareholders and Directors shall be open to inspection
upon the written demand of any Shareholder at any reasonable time and for a
purpose reasonably related to his interests as a Shareholder and shall be
exhibited at any time when required by the demand of ten percent (10%) or more
of the Shares represented at any Shareholders' meeting. Such inspection may be
made in person or by an agent or attorney and shall include the right to make
extracts at the expense of the Shareholder. Demand of inspection other than at a
Shareholders' meeting shall be made in writing upon the President, Secretary or
Assistant Secretary of the Corporation.
8.3. INSPECTION OF BYLAWS. The Directors shall keep at
the principal office for the transaction of business of the Corporation the
original or a copy of these Bylaws as amended or otherwise altered to date,
certified by the Secretary, which shall be open to inspection by the
Shareholders at all reasonable times during office hours.
8.4. REPRESENTATION OF SHARES OF CORPORATIONS. The
President or any Vice President and the Secretary or Assistant Secretary of the
Corporation, acting either in person or by a proxy or proxies designated in a
written instrument duly executed by said officers, are authorized to vote,
represent, and exercise on behalf of the Corporation all rights incident to any
shares of any corporation standing in the name of the Corporation.
171
<PAGE> 20
8.5. SHAREHOLDERS' DISCLOSURES; REDEMPTION OF SHARES.
The Shareholders shall upon demand disclose to the Directors in writing such
information with respect to direct and indirect ownership of the Shares as the
Directors deem necessary to comply with the provisions of the Code and the
regulations thereunder as the same shall be from time to time amended or to
comply with the requirements of any other taxing authority. If the Corporation
has elected to qualify as a REIT and the Directors shall at any time and in good
faith be of the opinion that direct or indirect ownership of Shares of the
Corporation has or may become concentrated to an extent which would prevent the
Corporation from qualifying as a REIT under the REIT Provisions of the Code, the
Directors shall have the power by lot or other means deemed equitable by them to
prevent the transfer of and/or call for redemption a number of such Shares
sufficient in the opinion of the Directors to maintain or bring the direct or
indirect ownership of Shares of the Corporation into conformity with the
requirements for such a REIT. The redemption price shall be (i) the last
reported sale price of the Shares on the last business day prior to the
redemption date on the principal national securities exchange or quotation
system on which the Shares are listed or admitted to trading, or (ii) if not
determined as aforesaid, as determined in good faith by the Directors; provided,
however, that the provisions of Section 4.3(c) of the Certificate shall control
with respect to the redemption of Series A Preferred Shares. From and after the
date fixed for redemption by the Directors, the holder of any Shares so called
for redemption shall cease to be entitled to dividends, distributions, voting
rights and other benefits with respect to such Shares, excepting only to the
right to payment of the redemption price fixed as aforesaid. For the purpose of
this Section 8.5, the term "individual" shall be construed as provided in
Section 542(a)(2) of the Internal Revenue Code or any successor provisions and
"ownership" of Shares shall be determined as provided in Section 544 of the
Internal Revenue Code or any successor provision.
8.6. RIGHT TO REFUSE TO TRANSFER SHARES. Whenever it
is deemed by them to be reasonably necessary to protect the tax status of the
Corporation, the Directors may require a statement or affidavit from each
Shareholder or proposed transferee of Shares or warrants or similar rights to
purchase Shares, setting forth the number of Shares (and warrants, rights or
options to purchase Shares) already owned by him and any related Person
specified in the form prescribed by the Directors for that purpose. If, in the
opinion of the Directors, which shall be conclusive upon any proposed transferor
or proposed transferee of Shares or Warrants any proposed transfer or exercise
would jeopardize the status of the Corporation as a REIT under the Internal
Revenue Code of 1954, as now enacted or as hereafter amended, the Directors may
refuse to permit such transfer or exercise. Any attempted transfer or exercise
as to which the Directors have refused their permission shall be void and of no
effect to transfer any legal or beneficial interest in the Shares or Warrants.
All contracts for the sale or other transfer or exercise of Shares or Warrants
shall be subject to this provision.
8.7. LIMITATION ON ACQUISITION OF SHARES.
(a) Subject to the provisions of Section 8.7(b), no
person may own in excess of 9.8% of the total outstanding Shares, and no Shares
shall be transferred or issued (for example, upon the exercise of Warrants) to
any person if, following such transfer, such person's direct or indirect
ownership of Shares would exceed this limit. For the purpose of this Section
8.7, ownership of Shares shall be computed in accordance with Internal Revenue
Code Sections 542(a) and 544.
(b) If Shares are purportedly acquired by any person
in violation of this Section 8.7, such acquisition shall be valid only to the
extent it does not result in a violation of this Section 8.7, and such
acquisition shall be null and void with respect to the excess ("Excess Shares").
Excess Shares shall be deemed to have been acquired and to be held on behalf of
the Corporation, and, as the equivalent of Treasury Shares for such purpose,
shall not be considered to be outstanding for quorum or voting purposes, and
shall not be entitled to receive dividends, interest or any other distribution.
(c) This Section 8.7 shall apply to the acquisition of
Shares by means other than through the Corporation's Dividend Reinvestment Plan,
if any. So long as any person so holds more than 9.8% of the outstanding Shares,
a lower percentage limit may be established by the Directors to the extent
necessary to assure, to the extent possible, that no five persons own more than
50% of the outstanding Shares.
(d) The Corporation shall, if deemed necessary or
desirable to implement the provisions of this Section 8.7, include on the face
or back of each Share or Warrant certificate issued by the Corporation an
appropriate legend referring the holder of such certificate to the restrictions
contained in this Section 8.7 and stating that the complete text of this Section
8.7 is on file with the Secretary of the Corporation at the Corporation's
offices.
172
<PAGE> 21
(e) Nothing herein contained shall limit the ability
of the Directors to impose, or to seek judicial or other imposition of
additional restrictions if the Corporation has elected to be taxed under the
REIT Provisions of the Code and deemed necessary or advisable to protect the
Corporation and the interests of its Shareholders by preservation of the
Corporation's status as a qualified real estate investment trust under the REIT
Provisions of the Code.
(f) If any provision of this Section 8.7 or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issue, the validity of the remaining
provisions shall not be affected and the other applications of such provisions
shall be affected only to the extent necessary to comply with the determination
of such court.
8.8. RELIANCE. The Directors and officers may consult
with counsel, and the advice or opinion of such counsel shall be full and
complete personal protection to all of the Directors and officers in respect of
any action taken or suffered by them in good faith and in reliance on and in
accordance with such advice or opinion. In discharging their duties, Directors
and officers, when acting in good faith, may rely upon financial statements of
the Corporation represented to them to be correct by the Chairman or the officer
of the Corporation having charge of its books of account, or stated in a written
report by an independent certified public accountant fairly to present the
financial position of the Corporation. The Directors may rely, and shall be
personally protected in acting, upon any instrument or other document believed
by them to be genuine.
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify that:
1. I am the Secretary of CAPITAL ALLIANCE, INC., a
Delaware corporation; and
2. The foregoing Bylaws represent the Bylaws duly
adopted by the Directors of the Corporation on December _____, 1995.
CAPITAL ALLIANCE, INC.
Dated: December ___, 1995. By:
-------------------------------------
Linda St. John, Assistant Secretary
173
<PAGE> 1
EXHIBIT 4.2
SHAREHOLDER WARRANT AGREEMENT
DATED AS OF ______________, 1996
BETWEEN
CAPITAL ALLIANCE INCOME TRUST
A REAL ESTATE INVESTMENT TRUST
AND
CAPITAL ALLIANCE ADVISORS, INC.
WARRANTS TO PURCHASE SHARES OF COMMON STOCK
OF
CAPITAL ALLIANCE INCOME TRUST
A REAL ESTATE INVESTMENT TRUST
174
<PAGE> 2
SHAREHOLDER WARRANT AGREEMENT
AGREEMENT made as of ____________, 1996, by and between CAPITAL
ALLIANCE INCOME TRUST, A Real Estate Investment Trust, a Delaware corporation
(herein called the "Trust"), and CAPITAL ALLIANCE ADVISORS, INC. a California
corporation (herein called the "Warrant Agent").
RECITALS
The Trust has determined to issue and deliver warrants in
connection with the Trust's public offering (the "Offering") of a maximum of
1,500,000 shares of the Trust's common stock ("Common Shares"), entitling the
holders thereof to purchase up to an aggregate of 150,000 Common Shares
("Shares"). The Trust desires to provide in this Agreement for the form and
provisions of those warrants (the "Warrants"), the terms upon which they shall
be issued and exercised, and the respective rights and obligations of the Trust,
the Warrant Agent and the registered holders of the Warrants.
All acts and things necessary to make the Warrants, when executed
on behalf of the Trust and countersigned by or on behalf of the Warrant Agent,
as provided in this Agreement, the valid,binding and legal obligation of the
Trust, and to authorize the execution and delivery of this Agreement, have been
done and performed.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
ARTICLE 1
EXECUTION AND COUNTERSIGNATURE OF WARRANTS
1.1 (a) The Warrants to purchase Common Shares (the "Common
Warrants") shall be in substantially the form of Exhibit A hereto. Each Warrant
shall be signed by, or bear the facsimile signature of the Chairman of the Board
of the Trust and attested by the Secretary or an Assistant Secretary or
Treasurer or Assistant Treasurer of the Trust and shall bear a facsimile of the
Trust's seal. In case any officer whose facsimile signature has been placed upon
any Warrant shall have ceased to be such before such Warrant is issued, it may
be issued with the same effect as if such officer had not ceased to be such at
the date of issuance. No Warrant may be exercised until it has been
countersigned by the Warrant Agent as provided in paragraph (b) below.
(b) The Warrant Agent shall countersign a Warrant only
if:
(i) The Warrant is to be issued in substitution
for one or more previously duly issued and countersigned Warrants, as
hereinafter provided, or
(ii) The Trust instructs the Warrant Agent in
writing to do so.
(c) Unless and until countersigned by the Warrant
Agent pursuant to this Agreement, a Warrant shall be invalid and of no effect.
(d) Notwithstanding the provisions of this Article 1
or any other provision of this Agreement, Warrants will be issued in "unissued
certificate" form unless a shareholder makes a written request at the
commencement of the Warrant exercise period. Uncertificated Warrants will be
accounted for by the Trust's transfer agent in the same manner as Shares of the
Trust in similar form are accounted for.
ARTICLE 2
WARRANT PRICE, DURATION, EXERCISE OF WARRANTS
2.1 WARRANT PRICE. Each Warrant shall, when countersigned by the
Warrant Agent, entitle the registered holder thereof, subject to the provisions
thereof and of this Agreement, to purchase from the Trust the number of Common
Shares stated therein, at a price of $7.00 per Share, subject to adjustment as
provided in Article 3 hereto. The term "Warrant Price"
175
<PAGE> 3
as used in this Agreement refers to the price per Share at which Shares may be
purchased pursuant to the Warrants at the time a Warrant is exercised.
2.2 DURATION OF WARRANTS. Warrants may be exercised only (i) on
or after a date (the "Exercise Period Commencement Date") that is the last day
of the twenty-fourth month following the effective date of the Trust's initial
public offering of Shares and (ii) on or before the date that is twenty-four
months after the Exercise Period Commencement Date (the "Expiration Date"). Each
Warrant not exercised on or before the Expiration Date shall become void, and
all rights thereunder and all rights in respect thereof under this Agreement
shall cease on the Expiration Date.
2.3 EXERCISE OF WARRANTS.
(a) A Warrant, when countersigned by the Warrant Agent, may
be exercised in whole or in part on or after the Exercise Period Commencement
Date and up until the Expiration Date (the "Exercise Period"). The registered
holder may exercise the Warrant by surrendering it, at the corporate office of
the Warrant Agent, or at the office of its successor as Warrant Agent, in the
State of California, with the subscription form set forth in the Warrant duly
executed, and by paying the Warrant Price in lawful money of the United States,
so that the Warrant Price for each full Share as to which the Warrant is
exercised and any applicable taxes are paid in full.
(b) As soon as practicable after the exercise of any Warrant
and upon the order of the registered holder of such Warrant, shall issue a
certificate or certificates for the number of full shares to which the holder is
entitled, registered in such name or names as may be directed by him or failing
such order shall be issued in uncertificated form. If such Warrant shall not
have been exercised in full (except with respect to a remaining fraction of a
Share), a new countersigned Warrant shall be issued for the number of Shares as
to which such Warrant shall not have been exercised.
In the event of the exercise of any Warrant in a manner which
leaves the right to purchase a fraction of a Share unexercised, the Trust shall
pay in lieu of such fractional interest, an amount in cash equal to the current
market value of such fractional share, to the nearest one-hundredth of a share
computed on the basis of (i) the last reported sale price of Shares for which
the Warrant is exercised on the date of that exercise on the principal national
securities exchange or system on which those Shares are listed or admitted to
trading, (ii) if the Shares are not so listed or admitted to trading, the
average of the high bid and low asked price on the over-the-counter market on
that date and, (iii) if the foregoing is inapplicable, the value of the Shares
as determined in good faith by the Directors of the Trust (hereinafter referred
to as "Trustees").
(c) All Shares issued upon the exercise of a Warrant shall be
validly issued, fully paid and nonassessable, and the Trust shall pay all taxes
in respect of the issue thereof. The Trust shall not be required, however, to
pay any tax imposed in connection with any transfer involved in the issue of a
certificate for Shares in any name other than that of the registered holder of
the Warrant surrendered in connection with the purchase thereof; and in such
case the Trust shall not be required to issue or deliver any Share certificate
until such tax is paid.
(d) Each person in whose name any such certificate for Shares
is issued shall for all purposes be deemed to have become the holder of record
of such Shares on the date on which the Warrant was delivered to the Warrant
Agent and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate; except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Trust are closed, such person shall be deemed to have become the holder of
such Shares at the close of business on the next succeeding date on which the
stock transfer books are open.
(e) Notwithstanding anything contained in this Section 2.3 or
elsewhere in this Agreement, the Trust, pursuant to Sections 8.5, 8.6 and 8.7 of
its Bylaws, may refuse the exercise of a Warrant if, in the opinion of counsel
for the Trust, the issuance of Shares to the Holder, upon such exercise would
disqualify the Trust as a "real estate investment trust" within the meaning of
the United States Internal Revenue Code as in effect at the time of exercise or
subject Trust property to treatment as "plan assets" under the Employee
Retirement Income Security Act of 1974.
176
<PAGE> 4
ARTICLE 3
ADJUSTMENTS
3.1 RECAPITALIZATION OR SUBDIVISION.
(a) If any capital reorganization or reclassification of the
Shares of the Trust, or consolidation or merger of the Trust with another
entity, or the sale or all or substantially all of its assets to another entity,
shall be effected in such a way that holders of Shares shall be entitled to
receive stock, securities, cash or assets with respect to or in exchange for
Shares, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, each Warrant Holder shall have the right
thereafter and until the Expiration Date to exercise his Warrants for the kind
and amount of stock, securities, cash or assets receivable upon such
reorganization, reclassification, consolidation, merger or sale to which the
registered holder of such Warrant would be entitled had such Warrant been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger or sale.
(b) In cast at any time the Trust shall subdivide its
outstanding Shares into a greater number of Shares, the Warrant Price in effect
immediately prior to such subdivision shall thereupon be proportionately reduced
and the number of Shares purchasable increased accordingly. For purposes of this
subparagraph (b), a dividend by the Trust payable in Shares of the Trust shall
be treated as a subdivision of the outstanding Shares. Conversely, in case the
outstanding Shares of the Trust shall be combined into a smaller number of
shares, the Warrant Price in effect immediately prior to such combination shall
be proportionately increased and the number of Shares purchasable decreased
accordingly.
(c) In case at any time the Trust shall take a record of the
holders of Shares for the purpose of entitling them to receive a dividend or
other distribution payable in Shares, then for purposes of this Section 3.1 such
record date shall be deemed to be the date of the issue of the Shares.
3.2 NOTICES OF CHANGES IN WARRANT. Upon any adjustment of the
Warrant Price and the number of Shares issuable on exercise of a Warrant, then,
and in each such case the Trust shall give written notice thereof to the
registered holder of the Warrant(s) at the address of such holder as shown on
the books of the Trust, and to the Warrant Agent, which notice shall state the
Warrant Price resulting from such adjustment and the increase or decrease, if
any, in the number of Shares purchasable at such price upon the exercise of a
Warrant, setting forth in reasonable detail thereof, issue a new Warrant of like
denomination, tenor and date.
3.3 OTHER NOTICES. In case at any time:
(a) The Trust shall declare dividends payable in Shares or
make any liquidating distribution to the registered holders of its Shares;
(b) The Trust shall offer any additional Shares for
subscription pro rata to the registered holders of its Shares;
(c) There shall be any capital reorganization,
reclassification of the Shares, consolidations or merger of the trust with, or
sale of all or substantially all of its assets to another entity; or
(d) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Trust, then, in any one or more of such cases,
the Trust shall give written notice to the registered holders of the Warrants at
the address of such holders as shown on the books of the Trust of the date on
which (i) the books of the Trust shall close or a record or registered holders
of Shares shall be taken for such liquidating distribution or subscription
rights, or (ii) such reorganization, reclassification, consolidation, merger,
refinancing, sale, dissolution liquidation, or winding up shall take place, as
the case may be. Such notice shall also specify the date as of which the holders
of Shares of record shall participate in such liquidating distribution or
subscription rights, or shall be entitled to exchange their Shares for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding up, as the case may be. Such notice shall be given and published at
least 20 days prior to the action in question and not less than 20 days prior to
the record date or the date on which the Trust's transfer books are closed in
respect thereto. Failure to give such notice, or any defect therein, shall not
affect the legality or validity of any of the matters set forth in this Section
3.3.
177
<PAGE> 5
3.4 FORM OF WARRANT. The form of Warrant need not be changes
because of any change pursuant to this Article 3, and Warrants issued after such
change may state the same Warrant Price and the same number of Shares as is
stated in the Warrants initially issued pursuant to this Agreement. However, the
Trust may at any time in its soled discretion make any change in the form of
Warrant that the Trust may deem appropriate and that does not affect the
substance thereof; and any Warrant thereafter issued or countersigned, whether
in exchange or substitution for an outstanding Warrant or otherwise, may be in
the form as so changed.
ARTICLE 4
OTHER PROVISIONS RELATING TO RIGHTS
OF REGISTERED HOLDERS OF WARRANTS
4.1 NO RIGHTS AS SHAREHOLDER CONFERRED BY WARRANTS. A Warrant
does not entitle the holder thereof to any of the rights of a Shareholder of the
Trust.
4.2 LOST, STOLEN, MUTILATED OR DESTROYED WARRANTS. If any Warrant
is lost, stolen, mutilated, or destroyed, the Trust and the Warrant Agent may,
upon such terms as to indemnify or otherwise as they may, in their discretion,
impose upon the registered holder thereof (which shall, in the case of a
mutilated Warrant, include the surrender thereof), issue a new Warrant of like
denomination, tenor, and date as the Warrant so lost, stolen, mutilated or
destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Trust, whether or not the allegedly lost, stolen, mutilated,
or destroyed Warrant shall be at any time enforceable by anyone.
4.3 RESERVATION OF SHARES. The Trust shall at all time keep
available for issuance a number of its Shares sufficient to permit the exercise
in full of all outstanding Warrants.
ARTICLE 5
TRANSFER AND EXCHANGE OF WARRANTS
5.1 The Trust will keep at the office or agency maintained
pursuant to Section 2.3 hereof a register or registers, in which, subject to
such reasonable regulations as it may prescribe, it will register all Warrants,
and the Trust hereby constitutes and appoints the Warrant Agent its Warrant
Registrar. No transfer of any Warrant shall be valid unless made upon such
register. Upon surrender for transfer of any Warrant at such office or agency,
the Trust shall execute and the Warrant Agent shall countersign and deliver, in
exchange, in the name of the transferee or transferees a new Warrant or Warrants
for a like number of Shares. The Warrants may be transferred separately from the
Shares.
All Warrants issued upon any registration of transfer or exchange
of Warrants shall be the valid obligation of the Trust, entitled to the same
benefits under this Shareholder Warrant Agreement as the Warrants surrendered
upon such registration of transfer or exchange. Every Warrant presented or
surrendered for registration of transfer or for exchange shall (if so required
by the Trust or the Warrant Agent) be duly endorsed, or be accompanied by a
written instrument of transfer in form satisfactory to the Trust and the Warrant
Agent, duly executed by the holder of the Warrant or by his attorney duly
authorized in writing. No service charge shall be made for any registration of
transfer or exchange of Warrants, but the Trust may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Warrants.
Notwithstanding any terms contained in this Section 5.1 or
elsewhere in this Agreement, the Trust may refuse to transfer a Warrant pursuant
to Sections 8.6 and 8.7 of its Bylaws.
ARTICLE 6
CONCERNING THE WARRANT AGENT
6.1 PAYMENT OF TAXES. The Trust shall from time to time promptly
pay all taxes and charges that may be imposed upon the Trust or the Warrant
Agent in respect of the issuance or delivery of Shares upon the exercise of
Warrants, but the Trust shall not be obligated to pay any transfer taxes in
respect of the Warrants of such Shares.
178
<PAGE> 6
6.2 DUTIES OF WARRANT AGENT. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, pursuant to which the Trust and the registered holders of Warrants
shall be bound:
(a) The statements contained herein and in the
Warrants shall be taken as statements of the Trust and the Warrant Agent assumes
no responsibility for the correctness of any of the same except for those that
describe the Warrant Agent or action to be taken by it. The Warrant Agent
assumes no responsibility with respect to the distribution of the Warrants.
(b) The Warrant Agent shall not be responsible for any
failure of the Trust to comply with any of the covenants contained in this
Agreement or in the Warrants.
(c) The Warrant Agent may execute and exercise any of
the rights or powers hereby vested in it or perform any duty hereunder either
itself or by or through its attorneys, agents or employees and the Warrant Agent
shall not be answerable or accountable for any act, default, neglect or
misconduct of any such attorneys, agents or employees or for any damage to the
Trust resulting from such act, default, neglect or misconduct, provided the
Warrant Agent has exercised reasonable care in the selection and continued
employment thereof.
(d) The Warrant Agent may consult at any time with
counsel (who may be counsel for the Trust) and the Warrant Agent shall incur no
liability or responsibility to the Trust or to any holder of any Warrant in
respect of any action taken, suffered or omitted by it hereunder in good faith
and in accordance with the opinion or the advice of such counsel.
(e) The Trust agrees to pay to the Warrant Agent
reasonable compensation for all services rendered by the Warrant Agent in the
execution of this Agreement, to reimburse the Warrant Agent for all expenses,
counsel fees, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent in the execution of this Agreement and to
indemnify the Warrant Agent and save it harmless against any and all
liabilities, losses and expenses including judgments, costs and counsel fees,
for anything done or omitted by the Warrant Agent in the execution of this
Agreement except as a result of the Warrant Agent's negligence or bad faith.
(f) The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to take any other action
likely to involve expense unless the Trust, or one or more holders of Warrants
shall furnish the Warrant Agent with reasonable security and indemnity for any
cost and expenses which may be incurred, but this provision shall not affect the
power of the Warrant Agent to take such action as the Warrant Agent may consider
proper, whether with or without any such security or indemnity.
(g) The Warrant Agent and any stockholder, director,
officer or employee of the Warrant Agent may buy, sell or deal in any of the
Warrants or other securities of the Trust in accordance with applicable
requirements under the federal and state securities and other laws or become
pecuniarily interested in any transaction in which the Trust may be interested,
or contract with or lend money to the Trust or otherwise act as fully and freely
as though it were not Warrant Agent under this Agreement. Nothing herein shall
preclude the Warrant Agent from acting in any other capacity for the Trust or
for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as
agent and in a ministerial capacity, and its duties shall be determined solely
by the provisions hereof. The Warrant Agent shall not be liable for anything
which it may do or refrain from doing in connection with this Agreement except
for its own negligence or bad faith.
(i) The Warrant Agent shall incur no liability or
responsibility to the Trust or to any holder of a Warrant for any action taken
in reliance on any debenture, notice, resolution, waiver, consent, order,
certificate or other paper, document or instrument believed by it in good faith
to be genuine.
(j) The Warrant Agent shall not be under any
responsibility in respect of the validity of this Agreement or the execution and
delivery hereof (except the due execution hereof by the Warrant Agent) or in
respect of the validity or execution of any Warrant (except its countersignature
thereof); nor shall the Warrant Agent by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any Shares
(or any other stock or security) to be issued pursuant to this Agreement or any
Warrant or as to whether any Shares (or any other stock or security) will,
179
<PAGE> 7
when issued, be validly issued, fully paid and nonassessable or as to the
Warrant Price, or the number or kind or amount of Shares or other securities or
other property issuable upon exercise of any Warrant.
(k) The Warrant Agent is hereby authorized and
directed to accept instructions with respect to the performance of its duties
hereunder from the President or Chairman of the Board or the Secretary or any
Assistant Secretary or the Treasurer or any Assistant Treasurer of the Trust,
and to apply to such officers for advice or instructions or the determination of
any matter in connection with its duties, and it shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with the
advice or determination or instructions of any such officer.
6.3 RESIGNATION, CONSOLIDATION OR MERGER OF WARRANT AGENT.
(a) The Warrant Agent, or any successor to it
hereafter appointed, may resign and be discharged from all further duties and
liabilities hereunder after giving notice in writing to the Trust. If the office
of the Warrant Agent becomes vacant by reason of such resignation or the
incapacity to act or otherwise, the Trust shall appoint in writing a successor
Warrant Agent in place of the Warrant Agent. The Trust shall indemnify and hold
the Warrant Agent harmless from and against all claims, expenses or causes of
action resulting from the failure of the Trust to make such appointment prior to
the effective date of resignation of the Warrant Agent.
Any resignation of the Warrant Agent for cause, or after the
failure of the Company to pay any fees or expenses due to the Warrant Agent for
a period of 30 days after the date due, shall become effective immediately. Any
resignation of the Warrant Agent for any other reason shall become effective 30
days after the date on which the Warrant Agent shall give notice of resignation
to the Trust.
Any successor Warrant Agent shall be a corporation organized and
doing business under the laws of the United States of America or of any state
therein, in good standing, authorized under applicable laws to exercise
corporate trust powers and subject to supervision or examination by federal or
state authority for not less than five (5) years preceding appointment as
successor Warrant Agent. After appointment, any successor Warrant Agent shall be
vested with all the authority, powers, rights immunities, duties and obligations
of its predecessor Warrant Agent with like effect as if originally named as
Warrant Agent hereunder, without any further act or deed; but if for any reason
it becomes necessary or appropriate, the predecessor Warrant Agent shall execute
and deliver at the expense of the Trust, an instrument transferring to such
successor Warrant Agent all the authority, powers and rights of such predecessor
Warrant Agent hereunder; and upon request of any successor Warrant Agent the
Trust shall make, execute, acknowledge and deliver any and all instruments in
writing for more fully and effectively vesting in and confirming to such
successor Warrant Agent all such authority, powers, rights, immunities, duties
and obligations. Not later than the effective date of any such appointment, the
Trust shall give notice thereof to the predecessor Warrant Agent and each
transfer agent for the Shares, and shall forthwith deliver notice of the same to
each registered holder of Warrants. Failure to give such notice, or any defect
therein, shall not affect the validity of the appointment of the successor
Warrant Agent. Any corporation into which the Warrant Agent may be merged or
with which it may be consolidated, or any corporation resulting from any merger
or consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor Warrant Agent under
the provisions of this subsection (a).
(b) In case at the time such successor to the Warrant
Agent shall succeed to the agency created by this Agreement, any of the Warrants
shall have been countersigned but not delivered, any such successor to the
Warrant Agent may adopt the countersignature of the original Warrant Agent and
deliver such Warrants so countersigned; and in case at that time any of the
Warrants shall not have been countersigned, any successor to the Warrant Agent
may countersign such Warrants either in the name of the predecessor Warrant
Agent or in the name of the successor Warrant Agent; and in all such cases such
Warrant shall have the full force provided in the Warrants and in this
Agreement.
6.4 FEES AND EXPENSES OF WARRANT AGENT. The Trust agrees (a) that
it will pay the Warrant Agent for its services as such Warrant Agent hereunder,
compensation as set forth in the Fee Schedule attached hereto and will reimburse
the Warrant Agent upon demand for all expenditures that the Warrant Agent may
reasonably incur in the execution of its duties hereunder; and (b) that it will
perform, execute, acknowledge and deliver or cause to be performed, executed,
180
<PAGE> 8
acknowledged and delivered all such further and other acts, instruments and
assurances as may reasonably be required by the Warrant Agent for the carrying
out or performing of the provisions of this Agreement.
6.5 MODIFICATION OF THIS AGREEMENT. The Warrant Agent may,
without the consent or concurrence of the registered holders of the Warrants, by
supplemental agreement or otherwise, concur with the Trust in making any changes
or corrections in this Agreement that it shall have been advised by counsel (who
may be counsel for the Trust) are required to cure any ambiguity or to correct
any defective or inconsistent provision or clerical omission or mistake or
manifest error herein contained.
6.6 REPLACEMENT OF WARRANT AGENT. The Trust may terminate its
Agreement with the Warrant Agent and appoint a substitute Warrant Agent at any
time on 30 days' advance notice to the Warrant Agent and the Warrant Agent may
terminate this Agreement with the Trust at any time on 30 days advance notice to
the Trust.
6.7 SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Trust and the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
ARTICLE 7
REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE TRUST
7.1 The Trust represents and warrants to the Warrant Agent that:
(a) It has a satisfactory number of Shares available
for issuance upon the exercise of the Warrants, and covenants and agrees that it
will, at all times, cause to be available and free from pre-emptive rights, out
of its authorized but unissued Shares such number of Shares as shall be required
to be issued by it from time to time upon the exercise of the Warrants, in
accordance with their terms and the terms of this Agreement, and the transfer
agent for any Shares and every subsequent transfer agent for any Shares of the
Trust issuable upon the exercise of any of the Warrants are hereby irrevocably
authorized and directed at all times to keep available such number of authorized
and unissued shares as shall be requisite for such purpose. The Trust agrees
that all Shares issued upon exercise of the Warrants shall be, at the time of
delivery of the certificate for such Shares, validly issued, fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof.
(b) The Trust has filed or will have filed with the
Securities and Exchange Commission (the "Commission") a registration statement
on Form S-11 for the registration under the Securities Act of 1933 (the "Act")
of the Warrants and Shares issuable pursuant to the exercise thereof. Before
such registration statement shall become effective, the Trust will file with the
Commission one or more amendments thereto. Such registration statement,
including all exhibits thereto, and the final prospectus, included therein, each
as amended at the time such registration statement became effective and as
further amended or supplemented, from time to time, is hereinafter called the
"Registration Statement" and the "Prospectus," respectively.
(c) With respect to the Trust's Registration Statement
as described in (b) above, the Commission has not issued any order preventing or
suspending its use and the Prospectus conforms in all material respects to the
requirements of the Securities Act of 1933 (the "Act") and the rules and
regulations of the Commission thereunder and does not include any incorrect
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and since the
respective dates as of which information is given in the Registrations Statement
and the Prospectus, there has not been any material adverse change in the
general affairs, management, financial position, shareholders' equity or results
of operations of the Trust and its subsidiaries, other than as set forth or
contemplated in the Prospectus. The Trust will use its best efforts to keep the
Registration Statement in effect as required by the Act for the duration of the
Exercise period of the Warrants.
181
<PAGE> 9
ARTICLE 8
OTHER MATTERS
8.1 NOTICES AND DEMANDS TO TRUST AND WARRANT AGENT. Any notice or
demand authorized by this Agreement to be given or made by the Warrant Agent or
by the registered holder of any Warrant to or on the Trust shall be sufficiently
given or made if sent by first class or registered mail, postage prepaid,
addressed (until another address is filed in writing by the Trust with the
Warrant Agent) as follows:
CAPITAL ALLIANCE INCOME TRUST
50 California Street, Suite 2020
San Francisco, CA 94111
Any notice or demand authorized by this Agreement to be given or
made by the registered holder of any Warrant or by the Trust to or on the
Warrant Agent shall be sufficiently given or made if sent by first class or
registered mail, postage prepaid, addressed (until another address is filed in
writing by the Warrant Agent with the Trust), as follows:
CAPITAL ALLIANCE ADVISORS, INC.
50 California Street, Suite 2020
San Francisco, CA 94111
8.2 APPLICABLE LAW. The validity, interpretation and performance
of this Agreement and of the Warrants shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts made
and wholly performed in such state.
8.3 PERSONS HAVING RIGHTS UNDER THIS AGREEMENT. Nothing expressed
in this Agreement and nothing that may be implied from any of the provisions
hereof is intended, or shall be construed to confer upon, or give to, any person
or corporation other than the parties hereto and the registered holders of
Warrants any right, remedy or claim under or by reason of this Agreement or of
any covenant, warranty, condition, stipulation, promise, or agreement therein,
and all covenants, warranties, conditions, stipulations, promises and agreements
in this Agreement contained shall be for the sole and exclusive benefit of the
parties hereto and the successors of the registered holders of Warrants.
8.4 EXAMINATION OF THIS AGREEMENT AND OF THE WARRANTS. A copy of
this Agreement shall be available at all reasonable times at the corporate trust
office of the Warrant Agent for inspection by the registered holder of any
Warrant. The Warrant Agent may require any such registered holder to submit his
Warrant for inspection by it.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
182
<PAGE> 10
8.5 EFFECT OF HEADINGS. The Article and Section headings herein
are for convenience only and are not part of this Agreement and shall not affect
the interpretation thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
TRUST:
CAPITAL ALLIANCE INCOME TRUST
A Real Estate Investment Trust
By:
-------------------------------
Its:
-------------------------------
Attest:
- ------------------------------
AGENT:
CAPITAL ALLIANCE ADVISORS, INC.
By:
-------------------------------
Its:
-------------------------------
Attest:
- ------------------------------
183
<PAGE> 11
(EXHIBIT A)
CAPITAL ALLIANCE INCOME TRUST
(This Warrant will be void after ________________, 2000)
This Warrant Certificate certifies that ________________________
_________________________, or registered assigns, is the registered holder of a
Warrant or Warrants expiring _______________________ 19___ (the "Warrant") to
purchase one Share of Common Stock, without par value ("Shares") of Capital
Alliance Income Trust, a Real Estate Investment Trust, a Delaware corporation
(the "Trust") for each Warrant evidenced by this Warrant Certificate. The
Warrant entitles the holder thereof to purchase from the Trust, at any time
after 24 months following the effective date of the Trust's initial public
offering of Common Stock, and before expiration thereof 24 months after such 24
months expires, such number of Shares of the Trust at the price of $7.00 per
Share, upon surrender of this Warrant Certificate and payment of the Warrant
Price at the office or agency of the Warrant Agent, Capital Alliance Advisors,
Inc., but only subject to the conditions set forth herein and in the Shareholder
Warrant Agreement referred to on the reverse hereof. The Warrant Price and the
number of Shares purchasable hereunder are subject to adjustment upon the
occurrence of certain events set forth in the Shareholder Warrant Agreement. The
term Warrant Price as used in this Warrant Certificate refers to the price per
Share at which Shares may be purchased pursuant to the Warrant at the time the
Warrant is exercised.
The Shareholder Warrant Agreement provides that upon the
occurrence of certain events the Warrant Price and the number of Warrant Shares
purchasable hereunder, set forth on the face hereof may, subject to certain
conditions, be adjusted. No fraction of a Share will be issued upon any exercise
of a Warrant, but the person entitled to such fractional interest shall, as
provided in the Shareholder Warrant Agreement, upon exercise of the Warrant, be
entitled to a cash payment for such fractional interest equal to the current
market value of such fractional interest, determined in accordance with the
provisions of the Shareholder Warrant Agreement.
Upon any exercise of the Warrant for less than the total number
of full shares provided for herein, there shall be issued to the registered
holder hereof or his assignee a new Warrant Certificate, if requested by the
holder, covering the number of Shares for which the Warrant has not been
exercised, otherwise the Warrants will be issued in uncertificated form.
Warrant Certificates, when surrendered at the office or agency of
the Warrant Agent by the registered holder hereof in person or by attorney duly
authorized in writing, may be exchanged in the manner and subject to the
limitations provided in the Shareholder Warrant Agreement, but without payment
of any service charge, for another Warrant Certificate or Warrant Certificates
of like tenor and evidencing in the aggregate a like number of Warrants.
Upon due presentment for registration of transfer of the Warrant
Certificate at the office or agency of the Warrant Agent, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants, if requested, shall be issued to the
transferee in exchange for this Warrant Certificate, subject to the limitations
provided in the Shareholder Warrant Agreement, without charge except for any
applicable tax or other governmental charge. Otherwise, such Warrants will be
issued in uncertificated form.
Notwithstanding anything contained in the Warrant or the
Shareholder Warrant Agreement, the Trust may refuse the exercise of the Warrant
pursuant to Sections 8.5, 8.6 and 8.7 of the Bylaws.
The Trust and the Warrant Agent may deem and treat the registered
holder as the absolute owner of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, of any distribution to the registered holder, and for
all other purposes, and neither the Trust nor the Warrant Agent shall be
affected by any notice to the contrary.
This Warrant does not entitle the registered holder to any of the
rights of a Shareholder of the Trust.
184
<PAGE> 12
REVERSE SIDE OF EXHIBIT A - SHAREHOLDER'S WARRANT AGREEMENT
The Warrant evidenced by this Warrant Certificate is part of a
duly authorized issue of Warrants expiring at 5:00 p.m. Pacific Time,
___________________, 19____, to purchase up to and including one Share, $.01 par
value, of the Trust, and is issued pursuant to a Shareholder Warrant Agreement
dated as of ________________, 1996 (the "Shareholder Warrant Agreement"), duly
executed and delivered by the Trust to Capital Alliance Advisors, Inc. (the
"Warrant Agent"), which Shareholder Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Warrant Agent, the Trust and the holders, the words
"holders" or "holder" meaning the registered holders or registered holder of
Warrants.
Warrants may be exercised to purchase Shares from the Trust on or
after 24 months following the effective date of the Trust's initial public
offering, and on or before ______________, 1999 (24 months thereafter) at the
Warrant Price set forth on the face hereof, subject to adjustment in certain
events. The holder of the Warrant evidence by this Warrant Certificate may
exercise it by surrendering this Warrant Certificate, with the form of election
to purchase set forth hereon properly completed and executed, together with
payment of the Warrant Price at the office or agency of the Warrant Agent,
Capital Alliance Advisors, Inc., 50 California Street, Suite 2020, San
Francisco, California 94111. The Warrant Price shall be paid by cash or bank
check.
185
<PAGE> 13
FORM OF SUBSCRIPTION
[TO BE SIGNED ONLY UPON EXERCISE OF WARRANT]
To _____________________:
The undersigned hereby irrevocably elects to exercise Warrant(s)
represented by this Warrant Certificate, and to purchase the Shares issuable
upon exercise of such Warrants, and requests that certificates for such Shares
shall be issued in the name of, and cash for any fractional shares paid to,
_________________ whose address is _______________________.
By checking this box [ ], the undersigned requests that the
Shares be issued in Certificate form.
Dated:__________, 19____
_________________________________________________________
(Signature must conform in all respects to name of holder as
specified on the fact of the Warrant)
_________________________________________________________
Address
_________________________________________________________
FORM OF ASSIGNMENT
[TO BE SIGNED ONLY UPON TRANSFER OF WARRANT]
For value received, the undersigned hereby sells, assigns and
transfers unto _____________ Warrants represented by the within Warrant
Certificate, together with all right, title and interest therein, and do hereby
irrevocably constitute and appoint Capital Alliance Advisors, Inc., Attorney to
transfer said Warrants on the books of the within-named Trust, with full power
of substitution in the premises.
Dated:__________, 19____
________________________________________________________
(Signature must conform in all respects to name of holder as
specified on the fact of the Warrant)
186
<PAGE> 1
EXHIBIT 4.3
UNDERWRITER WARRANT AGREEMENT
DATED AS OF ______________, 1996
BETWEEN
CAPITAL ALLIANCE INCOME TRUST
A REAL ESTATE INVESTMENT TRUST
AND
CAPITAL ALLIANCE ADVISORS, INC.
WARRANTS TO PURCHASE SHARES OF COMMON STOCK
OF
CAPITAL ALLIANCE INCOME TRUST
A REAL ESTATE INVESTMENT TRUST
187
<PAGE> 2
UNDERWRITER WARRANT AGREEMENT
AGREEMENT made as of ____________, 1996, by and between CAPITAL
ALLIANCE INCOME TRUST, A Real Estate Investment Trust, a Delaware corporation
(herein called the "Trust"), and CAPITAL ALLIANCE ADVISORS, INC. a California
corporation (herein called the "Warrant Agent").
RECITALS
The Trust has determined to issue and deliver warrants to
Brookstreet Securities Corporation or its assignees (collectively "Underwriter")
in connection with the Trust's public offering (the "Offering") of a maximum of
1,500,000 shares of the Trust's common stock ("Common Shares"), entitling the
Underwriter to purchase up to an aggregate of 150,000 Common Shares ("Shares")
on the basis of one Warrant for each ten Common Shares sold in the public
offering. The Trust desires to provide in this Agreement for the form and
provisions of those warrants (the "Warrants"), the terms upon which they shall
be issued and exercised, and the respective rights and obligations of the Trust,
the Warrant Agent and the registered holders of the Warrants.
All acts and things necessary to make the Warrants, when executed
on behalf of the Trust and countersigned by or on behalf of the Warrant Agent,
as provided in this Agreement, the valid, binding and legal obligation of the
Trust, and to authorize the execution and delivery of this Agreement, have been
done and performed.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
ARTICLE 1
EXECUTION AND COUNTERSIGNATURE OF WARRANTS
1.1 (a) The Warrants to purchase Common Shares (the "Common
Warrants") shall be in substantially the form of Exhibit A hereto. Each Warrant
shall be signed by, or bear the facsimile signature of the Chairman of the Board
of the Trust and attested by the Secretary or an Assistant Secretary or
Treasurer or Assistant Treasurer of the Trust and shall bear a facsimile of the
Trust's seal. In case any officer whose facsimile signature has been placed upon
any Warrant shall have ceased to be such before such Warrant is issued, it may
be issued with the same effect as if such officer had not ceased to be such at
the date of issuance. No Warrant may be exercised until it has been
countersigned by the Warrant Agent as provided in paragraph (b) below.
(b) The Warrant Agent shall countersign a Warrant only if:
(i) The Warrant is to be issued in substitution for one
or more previously duly issued and countersigned Warrants, as hereinafter
provided, or
(ii) The Trust instructs the Warrant Agent in writing to
do so.
(c) Unless and until countersigned by the Warrant Agent
pursuant to this Agreement, a Warrant shall be invalid and of no effect.
(d) Notwithstanding the provisions of this Article 1 or any
other provision of this Agreement, Warrants will be issued in "unissued
certificate" form unless a shareholder makes a written request at the
commencement of the Warrant exercise period. Uncertificated Warrants will be
accounted for by the Trust's transfer agent in the same manner as Shares of the
Trust in similar form are accounted for.
ARTICLE 2
WARRANT PRICE, DURATION, EXERCISE OF WARRANTS
2.1 WARRANT PRICE. Each Warrant shall, when countersigned by the
Warrant Agent, entitle the registered holder thereof, subject to the provisions
thereof and of this Agreement, to purchase from the Trust the number of Common
Shares
188
<PAGE> 3
stated therein, at a price of $9.00 per Share, subject to adjustment as provided
in Article 3 hereto. The term "Warrant Price" as used in this Agreement refers
to the price per Share at which Shares may be purchased pursuant to the Warrants
at the time a Warrant is exercised.
2.2 DURATION OF WARRANTS. Warrants may be exercised only (I) on
or after a date (the "Exercise Period Commencement Date") that is the last day
of the twenty-fourth month following the effective date of the Trust's initial
public offering of Shares and (ii) on or before the date that is twenty-four
months after the Exercise Period Commencement Date (the "Expiration Date"). Each
Warrant not exercised on or before the Expiration Date shall become void, and
all rights thereunder and all rights in respect thereof under this Agreement
shall cease on the Expiration Date.
2.3 EXERCISE OF WARRANTS.
(a) A Warrant, when countersigned by the Warrant Agent, may
be exercised in whole or in part on or after the Exercise Period Commencement
Date and up until the Expiration Date (the "Exercise Period"). The registered
holder may exercise the Warrant by surrendering it, at the corporate office of
the Warrant Agent, or at the office of its successor as Warrant Agent, in the
State of California, with the subscription form set forth in the Warrant duly
executed, and by paying the Warrant Price in lawful money of the United States,
so that the Warrant Price for each full Share as to which the Warrant is
exercised and any applicable taxes are paid in full.
(b) As soon as practicable after the exercise of any Warrant
and upon the order of the registered holder of such Warrant, shall issue a
certificate or certificates for the number of full shares to which the holder is
entitled, registered in such name or names as may be directed by him or failing
such order shall be issued in uncertificated form. If such Warrant shall not
have been exercised in full (except with respect to a remaining fraction of a
Share), a new countersigned Warrant shall be issued for the number of Shares as
to which such Warrant shall not have been exercised.
In the event of the exercise of any Warrant in a manner which
leaves the right to purchase a fraction of a Share unexercised, the Trust shall
pay in lieu of such fractional interest, an amount in cash equal to the current
market value of such fractional share, to the nearest one-hundredth of a share
computed on the basis of (I) the last reported sale price of Shares for which
the Warrant is exercised on the date of that exercise on the principal national
securities exchange or system on which those Shares are listed or admitted to
trading, (ii) if the Shares are not so listed or admitted to trading, the
average of the high bid and low asked price on the over-the-counter market on
that date and, (iii) if the foregoing is inapplicable, the value of the Shares
as determined in good faith by the Directors of the Trust (hereinafter referred
to as "Trustees").
(c) All Shares issued upon the exercise of a Warrant shall be
validly issued, fully paid and nonassessable, and the Trust shall pay all taxes
in respect of the issue thereof. The Trust shall not be required, however, to
pay any tax imposed in connection with any transfer involved in the issue of a
certificate for Shares in any name other than that of the registered holder of
the Warrant surrendered in connection with the purchase thereof; and in such
case the Trust shall not be required to issue or deliver any Share certificate
until such tax is paid.
(d) Each person in whose name any such certificate for Shares
is issued shall for all purposes be deemed to have become the holder of record
of such Shares on the date on which the Warrant was delivered to the Warrant
Agent and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate; except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Trust are closed, such person shall be deemed to have become the holder of
such Shares at the close of business on the next succeeding date on which the
stock transfer books are open.
(e) Notwithstanding anything contained in this Section 2.3 or
elsewhere in this Agreement, the Trust, pursuant to Sections 8.5, 8.6 and 8.7 of
its Bylaws, may refuse the exercise of a Warrant if, in the opinion of counsel
for the Trust, the issuance of Shares to the Holder, upon such exercise would
disqualify the Trust as a "real estate investment trust" within the meaning of
the United States Internal Revenue Code as in effect at the time of exercise or
subject Trust property to treatment as "plan assets" under the Employee
Retirement Income Security Act of 1974.
189
<PAGE> 4
ARTICLE 3
ADJUSTMENTS
3.1 RECAPITALIZATION OR SUBDIVISION.
(a) If any capital reorganization or reclassification of the
Shares of the Trust, or consolidation or merger of the Trust with another
entity, or the sale or all or substantially all of its assets to another entity,
shall be effected in such a way that holders of Shares shall be entitled to
receive stock, securities, cash or assets with respect to or in exchange for
Shares, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, each Warrant Holder shall have the right
thereafter and until the Expiration Date to exercise his Warrants for the kind
and amount of stock, securities, cash or assets receivable upon such
reorganization, reclassification, consolidation, merger or sale to which the
registered holder of such Warrant would be entitled had such Warrant been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger or sale.
(b) In cast at any time the Trust shall subdivide its
outstanding Shares into a greater number of Shares, the Warrant Price in effect
immediately prior to such subdivision shall thereupon be proportionately reduced
and the number of Shares purchasable increased accordingly. For purposes of this
subparagraph (b), a dividend by the Trust payable in Shares of the Trust shall
be treated as a subdivision of the outstanding Shares. Conversely, in case the
outstanding Shares of the Trust shall be combined into a smaller number of
shares, the Warrant Price in effect immediately prior to such combination shall
be proportionately increased and the number of Shares purchasable decreased
accordingly.
(c) In case at any time the Trust shall take a record of the
holders of Shares for the purpose of entitling them to receive a dividend or
other distribution payable in Shares, then for purposes of this Section 3.1 such
record date shall be deemed to be the date of the issue of the Shares.
3.2 NOTICES OF CHANGES IN WARRANT. Upon any adjustment of the
Warrant Price and the number of Shares issuable on exercise of a Warrant, then,
and in each such case the Trust shall give written notice thereof to the
registered holder of the Warrant(s) at the address of such holder as shown on
the books of the Trust, and to the Warrant Agent, which notice shall state the
Warrant Price resulting from such adjustment and the increase or decrease, if
any, in the number of Shares purchasable at such price upon the exercise of a
Warrant, setting forth in reasonable detail thereof, issue a new Warrant of like
denomination, tenor and date.
3.3 OTHER NOTICES. In case at any time:
(a) The Trust shall declare dividends payable in Shares or
make any liquidating distribution to the registered holders of its Shares;
(b) The Trust shall offer any additional Shares for
subscription pro rata to the registered holders of its Shares;
(c) There shall be any capital reorganization,
reclassification of the Shares, consolidations or merger of the trust with, or
sale of all or substantially all of its assets to another entity; or
(d) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Trust, then, in any one or more of such cases,
the Trust shall give written notice to the registered holders of the Warrants at
the address of such holders as shown on the books of the Trust of the date on
which (I) the books of the Trust shall close or a record or registered holders
of Shares shall be taken for such liquidating distribution or subscription
rights, or (ii) such reorganization, reclassification, consolidation, merger,
refinancing, sale, dissolution liquidation, or winding up shall take place, as
the case may be. Such notice shall also specify the date as of which the holders
of Shares of record shall participate in such liquidating distribution or
subscription rights, or shall be entitled to exchange their Shares for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding up, as the case may be. Such notice shall be given and published at
least 20 days prior to the action in question and not less than 20 days prior to
the record date or the date on which the Trust's transfer books are closed in
respect thereto. Failure to give such notice, or any defect therein, shall not
affect the legality or validity of any of the matters set forth in this Section
3.3.
190
<PAGE> 5
3.4 FORM OF WARRANT. The form of Warrant need not be changes
because of any change pursuant to this Article 3, and Warrants issued after such
change may state the same Warrant Price and the same number of Shares as is
stated in the Warrants initially issued pursuant to this Agreement. However, the
Trust may at any time in its soled discretion make any change in the form of
Warrant that the Trust may deem appropriate and that does not affect the
substance thereof; and any Warrant thereafter issued or countersigned, whether
in exchange or substitution for an outstanding Warrant or otherwise, may be in
the form as so changed.
ARTICLE 4
OTHER PROVISIONS RELATING TO RIGHTS
OF REGISTERED HOLDERS OF WARRANTS
4.1 NO RIGHTS AS SHAREHOLDER CONFERRED BY WARRANTS. A Warrant
does not entitle the holder thereof to any of the rights of a Shareholder of the
Trust.
4.2 LOST, STOLEN, MUTILATED OR DESTROYED WARRANTS. If any Warrant
is lost, stolen, mutilated, or destroyed, the Trust and the Warrant Agent may,
upon such terms as to indemnify or otherwise as they may, in their discretion,
impose upon the registered holder thereof (which shall, in the case of a
mutilated Warrant, include the surrender thereof), issue a new Warrant of like
denomination, tenor, and date as the Warrant so lost, stolen, mutilated or
destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Trust, whether or not the allegedly lost, stolen, mutilated,
or destroyed Warrant shall be at any time enforceable by anyone.
4.3 RESERVATION OF SHARES. The Trust shall at all time keep
available for issuance a number of its Shares sufficient to permit the exercise
in full of all outstanding Warrants.
ARTICLE 5
TRANSFER AND EXCHANGE OF WARRANTS
5.1 The Trust will keep at the office or agency maintained
pursuant to Section 2.3 hereof a register or registers, in which, subject to
such reasonable regulations as it may prescribe, it will register all Warrants,
and the Trust hereby constitutes and appoints the Warrant Agent its Warrant
Registrar. No transfer of any Warrant shall be valid unless made upon such
register. Upon surrender for transfer of any Warrant at such office or agency,
the Trust shall execute and the Warrant Agent shall countersign and deliver, in
exchange, in the name of the transferee or transferees a new Warrant or Warrants
for a like number of Shares. The Warrants may be transferred separately from the
Shares.
All Warrants issued upon any registration of transfer or exchange
of Warrants shall be the valid obligation of the Trust, entitled to the same
benefits under this Underwriter Warrant Agreement as the Warrants surrendered
upon such registration of transfer or exchange. Every Warrant presented or
surrendered for registration of transfer or for exchange shall (if so required
by the Trust or the Warrant Agent) be duly endorsed, or be accompanied by a
written instrument of transfer in form satisfactory to the Trust and the Warrant
Agent, duly executed by the holder of the Warrant or by his attorney duly
authorized in writing. No service charge shall be made for any registration of
transfer or exchange of Warrants, but the Trust may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Warrants.
Notwithstanding any terms contained in this Section 5.1 or
elsewhere in this Agreement, the Trust may refuse to transfer a Warrant pursuant
to Sections 8.6 and 8.7 of its Bylaws.
ARTICLE 6
CONCERNING THE WARRANT AGENT
6.1 PAYMENT OF TAXES. The Trust shall from time to time promptly
pay all taxes and charges that may be imposed upon the Trust or the Warrant
Agent in respect of the issuance or delivery of Shares upon the exercise of
Warrants, but the Trust shall not be obligated to pay any transfer taxes in
respect of the Warrants of such Shares.
191
<PAGE> 6
6.2 DUTIES OF WARRANT AGENT. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, pursuant to which the Trust and the registered holders of Warrants
shall be bound:
(a) The statements contained herein and in the Warrants shall
be taken as statements of the Trust and the Warrant Agent assumes no
responsibility for the correctness of any of the same except for those that
describe the Warrant Agent or action to be taken by it. The Warrant Agent
assumes no responsibility with respect to the distribution of the Warrants.
(b) The Warrant Agent shall not be responsible for any
failure of the Trust to comply with any of the covenants contained in this
Agreement or in the Warrants.
(c) The Warrant Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys, agents or employees and the Warrant Agent shall
not be answerable or accountable for any act, default, neglect or misconduct of
any such attorneys, agents or employees or for any damage to the Trust resulting
from such act, default, neglect or misconduct, provided the Warrant Agent has
exercised reasonable care in the selection and continued employment thereof.
(d) The Warrant Agent may consult at any time with counsel
(who may be counsel for the Trust) and the Warrant Agent shall incur no
liability or responsibility to the Trust or to any holder of any Warrant in
respect of any action taken, suffered or omitted by it hereunder in good faith
and in accordance with the opinion or the advice of such counsel.
(e) The Trust agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the execution of
this Agreement, to reimburse the Warrant Agent for all expenses, counsel fees,
taxes and governmental charges and other charges of any kind and nature incurred
by the Warrant Agent in the execution of this Agreement and to indemnify the
Warrant Agent and save it harmless against any and all liabilities, losses and
expenses including judgments, costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution of this Agreement except as a
result of the Warrant Agent's negligence or bad faith.
(f) The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to take any other action
likely to involve expense unless the Trust, or one or more holders of Warrants
shall furnish the Warrant Agent with reasonable security and indemnity for any
cost and expenses which may be incurred, but this provision shall not affect the
power of the Warrant Agent to take such action as the Warrant Agent may consider
proper, whether with or without any such security or indemnity.
(g) The Warrant Agent and any stockholder, director, officer
or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Trust in accordance with applicable requirements under
the federal and state securities and other laws or become pecuniarily interested
in any transaction in which the Trust may be interested, or contract with or
lend money to the Trust or otherwise act as fully and freely as though it were
not Warrant Agent under this Agreement. Nothing herein shall preclude the
Warrant Agent from acting in any other capacity for the Trust or for any other
legal entity.
(h) The Warrant Agent shall act hereunder solely as agent and
in a ministerial capacity, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for anything which it
may do or refrain from doing in connection with this Agreement except for its
own negligence or bad faith.
(i) The Warrant Agent shall incur no liability or
responsibility to the Trust or to any holder of a Warrant for any action taken
in reliance on any debenture, notice, resolution, waiver, consent, order,
certificate or other paper, document or instrument believed by it in good faith
to be genuine.
(j) The Warrant Agent shall not be under any responsibility
in respect of the validity of this Agreement or the execution and delivery
hereof (except the due execution hereof by the Warrant Agent) or in respect of
the validity or execution of any Warrant (except its countersignature thereof);
nor shall the Warrant Agent by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any Shares
(or any other stock or security) to be issued pursuant to this Agreement or any
Warrant or as to whether any Shares (or any other stock or security) will,
192
<PAGE> 7
when issued, be validly issued, fully paid and nonassessable or as to the
Warrant Price, or the number or kind or amount of Shares or other securities or
other property issuable upon exercise of any Warrant.
(k) The Warrant Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
the President or Chairman of the Board or the Secretary or any Assistant
Secretary or the Treasurer or any Assistant Treasurer of the Trust, and to apply
to such officers for advice or instructions or the determination of any matter
in connection with its duties, and it shall not be liable for any action taken
or suffered to be taken by it in good faith in accordance with the advice or
determination or instructions of any such officer.
6.3 RESIGNATION, CONSOLIDATION OR MERGER OF WARRANT AGENT.
(a) The Warrant Agent, or any successor to it hereafter
appointed, may resign and be discharged from all further duties and liabilities
hereunder after giving notice in writing to the Trust. If the office of the
Warrant Agent becomes vacant by reason of such resignation or the incapacity to
act or otherwise, the Trust shall appoint in writing a successor Warrant Agent
in place of the Warrant Agent. The Trust shall indemnify and hold the Warrant
Agent harmless from and against all claims, expenses or causes of action
resulting from the failure of the Trust to make such appointment prior to the
effective date of resignation of the Warrant Agent.
Any resignation of the Warrant Agent for cause, or after the
failure of the Company to pay any fees or expenses due to the Warrant Agent for
a period of 30 days after the date due, shall become effective immediately. Any
resignation of the Warrant Agent for any other reason shall become effective 30
days after the date on which the Warrant Agent shall give notice of resignation
to the Trust.
Any successor Warrant Agent shall be a corporation organized and
doing business under the laws of the United States of America or of any state
therein, in good standing, authorized under applicable laws to exercise
corporate trust powers and subject to supervision or examination by federal or
state authority for not less than five (5) years preceding appointment as
successor Warrant Agent. After appointment, any successor Warrant Agent shall be
vested with all the authority, powers, rights immunities, duties and obligations
of its predecessor Warrant Agent with like effect as if originally named as
Warrant Agent hereunder, without any further act or deed; but if for any reason
it becomes necessary or appropriate, the predecessor Warrant Agent shall execute
and deliver at the expense of the Trust, an instrument transferring to such
successor Warrant Agent all the authority, powers and rights of such predecessor
Warrant Agent hereunder; and upon request of any successor Warrant Agent the
Trust shall make, execute, acknowledge and deliver any and all instruments in
writing for more fully and effectively vesting in and confirming to such
successor Warrant Agent all such authority, powers, rights, immunities, duties
and obligations. Not later than the effective date of any such appointment, the
Trust shall give notice thereof to the predecessor Warrant Agent and each
transfer agent for the Shares, and shall forthwith deliver notice of the same to
each registered holder of Warrants. Failure to give such notice, or any defect
therein, shall not affect the validity of the appointment of the successor
Warrant Agent. Any corporation into which the Warrant Agent may be merged or
with which it may be consolidated, or any corporation resulting from any merger
or consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor Warrant Agent under
the provisions of this subsection (a).
(b) In case at the time such successor to the Warrant Agent
shall succeed to the agency created by this Agreement, any of the Warrants shall
have been countersigned but not delivered, any such successor to the Warrant
Agent may adopt the countersignature of the original Warrant Agent and deliver
such Warrants so countersigned; and in case at that time any of the Warrants
shall not have been countersigned, any successor to the Warrant Agent may
countersign such Warrants either in the name of the predecessor Warrant Agent or
in the name of the successor Warrant Agent; and in all such cases such Warrant
shall have the full force provided in the Warrants and in this Agreement.
6.4 FEES AND EXPENSES OF WARRANT AGENT. The Trust agrees (a) that
it will pay the Warrant Agent for its services as such Warrant Agent hereunder,
compensation as set forth in the Fee Schedule attached hereto and will reimburse
the Warrant Agent upon demand for all expenditures that the Warrant Agent may
reasonably incur in the execution of its duties hereunder; and (b) that it will
perform, execute, acknowledge and deliver or cause to be performed, executed,
193
<PAGE> 8
acknowledged and delivered all such further and other acts, instruments and
assurances as may reasonably be required by the Warrant Agent for the carrying
out or performing of the provisions of this Agreement.
6.5 MODIFICATION OF THIS AGREEMENT. The Warrant Agent may,
without the consent or concurrence of the registered holders of the Warrants, by
supplemental agreement or otherwise, concur with the Trust in making any changes
or corrections in this Agreement that it shall have been advised by counsel (who
may be counsel for the Trust) are required to cure any ambiguity or to correct
any defective or inconsistent provision or clerical omission or mistake or
manifest error herein contained.
6.6 REPLACEMENT OF WARRANT AGENT. The Trust may terminate its
Agreement with the Warrant Agent and appoint a substitute Warrant Agent at any
time on 30 days' advance notice to the Warrant Agent and the Warrant Agent may
terminate this Agreement with the Trust at any time on 30 days advance notice to
the Trust.
6.7 SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Trust and the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
ARTICLE 7
REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE TRUST
7.1 The Trust represents and warrants to the Warrant Agent that:
(a) It has a satisfactory number of Shares available for
issuance upon the exercise of the Warrants, and covenants and agrees that it
will, at all times, cause to be available and free from pre-emptive rights, out
of its authorized but unissued Shares such number of Shares as shall be required
to be issued by it from time to time upon the exercise of the Warrants, in
accordance with their terms and the terms of this Agreement, and the transfer
agent for any Shares and every subsequent transfer agent for any Shares of the
Trust issuable upon the exercise of any of the Warrants are hereby irrevocably
authorized and directed at all times to keep available such number of authorized
and unissued shares as shall be requisite for such purpose. The Trust agrees
that all Shares issued upon exercise of the Warrants shall be, at the time of
delivery of the certificate for such Shares, validly issued, fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof.
(b) The Trust has filed or will have filed with the
Securities and Exchange Commission (the "Commission") a registration statement
on Form S-11 for the registration under the Securities Act of 1933 (the "Act")
of the Warrants and Shares issuable pursuant to the exercise thereof. Before
such registration statement shall become effective, the Trust will file with the
Commission one or more amendments thereto. Such registration statement,
including all exhibits thereto, and the final prospectus, included therein, each
as amended at the time such registration statement became effective and as
further amended or supplemented, from time to time, is hereinafter called the
"Registration Statement" and the "Prospectus," respectively.
(c) With respect to the Trust's Registration Statement as
described in (b) above, the Commission has not issued any order preventing or
suspending its use and the Prospectus conforms in all material respects to the
requirements of the Securities Act of 1933 (the "Act") and the rules and
regulations of the Commission thereunder and does not include any incorrect
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and since the
respective dates as of which information is given in the Registrations Statement
and the Prospectus, there has not been any material adverse change in the
general affairs, management, financial position, shareholders' equity or results
of operations of the Trust and its subsidiaries, other than as set forth or
contemplated in the Prospectus. The Trust will use its best efforts to keep the
Registration Statement in effect as required by the Act for the duration of the
Exercise period of the Warrants.
194
<PAGE> 9
ARTICLE 8
OTHER MATTERS
8.1 NOTICES AND DEMANDS TO TRUST AND WARRANT AGENT. Any notice or
demand authorized by this Agreement to be given or made by the Warrant Agent or
by the registered holder of any Warrant to or on the Trust shall be sufficiently
given or made if sent by first class or registered mail, postage prepaid,
addressed (until another address is filed in writing by the Trust with the
Warrant Agent) as follows:
CAPITAL ALLIANCE INCOME TRUST
50 California Street, Suite 2020
San Francisco, CA 94111
Any notice or demand authorized by this Agreement to be given or
made by the registered holder of any Warrant or by the Trust to or on the
Warrant Agent shall be sufficiently given or made if sent by first class or
registered mail, postage prepaid, addressed (until another address is filed in
writing by the Warrant Agent with the Trust), as follows:
CAPITAL ALLIANCE ADVISORS, INC.
50 California Street, Suite 2020
San Francisco, CA 94111
8.2 APPLICABLE LAW. The validity, interpretation and performance
of this Agreement and of the Warrants shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts made
and wholly performed in such state.
8.3 PERSONS HAVING RIGHTS UNDER THIS AGREEMENT. Nothing expressed
in this Agreement and nothing that may be implied from any of the provisions
hereof is intended, or shall be construed to confer upon, or give to, any person
or corporation other than the parties hereto and the registered holders of
Warrants any right, remedy or claim under or by reason of this Agreement or of
any covenant, warranty, condition, stipulation, promise, or agreement therein,
and all covenants, warranties, conditions, stipulations, promises and agreements
in this Agreement contained shall be for the sole and exclusive benefit of the
parties hereto and the successors of the registered holders of Warrants.
8.4 EXAMINATION OF THIS AGREEMENT AND OF THE WARRANTS. A copy of
this Agreement shall be available at all reasonable times at the corporate trust
office of the Warrant Agent for inspection by the registered holder of any
Warrant. The Warrant Agent may require any such registered holder to submit his
Warrant for inspection by it.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
195
<PAGE> 10
8.5 EFFECT OF HEADINGS. The Article and Section headings herein
are for convenience only and are not part of this Agreement and shall not affect
the interpretation thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
TRUST:
CAPITAL ALLIANCE INCOME TRUST
A Real Estate Investment Trust
By:
-------------------------------
Its:
-------------------------------
Attest:
- --------------------------
AGENT:
CAPITAL ALLIANCE ADVISORS, INC.
By:
-------------------------------
Its:
-------------------------------
Attest:
- --------------------------
196
<PAGE> 11
(EXHIBIT A)
CAPITAL ALLIANCE INCOME TRUST
(This Warrant will be void after ________________, 2000)
This Warrant Certificate certifies that _______________________
_________________________, or registered assigns, is the registered holder of a
Warrant or Warrants expiring _______________________ 19___ (the "Warrant") to
purchase one Share of Common Stock, without par value ("Shares") of Capital
Alliance Income Trust, a Real Estate Investment Trust, a Delaware corporation
(the "Trust") for each Warrant evidenced by this Warrant Certificate. The
Warrant entitles the holder thereof to purchase from the Trust, at any time
after 24 months following the effective date of the Trust's initial public
offering of Common Stock, and before expiration thereof 24 months after such 24
months expires, such number of Shares of the Trust at the price of $9.00 per
Share, upon surrender of this Warrant Certificate and payment of the Warrant
Price at the office or agency of the Warrant Agent, Capital Alliance Advisors,
Inc., but only subject to the conditions set forth herein and in the Underwriter
Warrant Agreement referred to on the reverse hereof. The Warrant Price and the
number of Shares purchasable hereunder are subject to adjustment upon the
occurrence of certain events set forth in the Underwriter Warrant Agreement. The
term Warrant Price as used in this Warrant Certificate refers to the price per
Share at which Shares may be purchased pursuant to the Warrant at the time the
Warrant is exercised.
The Underwriter Warrant Agreement provides that upon the
occurrence of certain events the Warrant Price and the number of Warrant Shares
purchasable hereunder, set forth on the face hereof may, subject to certain
conditions, be adjusted. No fraction of a Share will be issued upon any exercise
of a Warrant, but the person entitled to such fractional interest shall, as
provided in the Underwriter Warrant Agreement, upon exercise of the Warrant, be
entitled to a cash payment for such fractional interest equal to the current
market value of such fractional interest, determined in accordance with the
provisions of the Underwriter Warrant Agreement.
Upon any exercise of the Warrant for less than the total number
of full shares provided for herein, there shall be issued to the registered
holder hereof or his assignee a new Warrant Certificate, if requested by the
holder, covering the number of Shares for which the Warrant has not been
exercised, otherwise the Warrants will be issued in uncertificated form.
Warrant Certificates, when surrendered at the office or agency of
the Warrant Agent by the registered holder hereof in person or by attorney duly
authorized in writing, may be exchanged in the manner and subject to the
limitations provided in the Underwriter Warrant Agreement, but without payment
of any service charge, for another Warrant Certificate or Warrant Certificates
of like tenor and evidencing in the aggregate a like number of Warrants.
Upon due presentment for registration of transfer of the Warrant
Certificate at the office or agency of the Warrant Agent, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants, if requested, shall be issued to the
transferee in exchange for this Warrant Certificate, subject to the limitations
provided in the Underwriter Warrant Agreement, without charge except for any
applicable tax or other governmental charge.
Otherwise, such Warrants will be issued in uncertificated form.
Notwithstanding anything contained in the Warrant or the
Underwriter Warrant Agreement, the Trust may refuse the exercise of the Warrant
pursuant to Sections 8.5, 8.6 and 8.7 of the Bylaws.
The Trust and the Warrant Agent may deem and treat the registered
holder as the absolute owner of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, of any distribution to the registered holder, and for
all other purposes, and neither the Trust nor the Warrant Agent shall be
affected by any notice to the contrary.
This Warrant does not entitle the registered holder to any of the
rights of a Shareholder of the Trust.
197
<PAGE> 12
REVERSE SIDE OF EXHIBIT A - UNDERWRITER'S WARRANT AGREEMENT
The Warrant evidenced by this Warrant Certificate is part of a
duly authorized issue of Warrants expiring at 5:00 p.m. Pacific Time,
___________________, 19____, to purchase up to and including one Share, $.01 par
value, of the Trust, and is issued pursuant to an Underwriter Warrant Agreement
dated as of ________________, 1996 (the "Underwriter Warrant Agreement"), duly
executed and delivered by the Trust to Capital Alliance Advisors, Inc. (the
"Warrant Agent"), which Underwriter Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Warrant Agent, the Trust and the holders, the words
"holders" or "holder" meaning the registered holders or registered holder of
Warrants.
Warrants may be exercised to purchase Shares from the Trust on or
after 24 months following the effective date of the Trust's initial public
offering, and on or before ______________, 1999 (24 months thereafter) at the
Warrant Price set forth on the face hereof, subject to adjustment in certain
events. The holder of the Warrant evidence by this Warrant Certificate may
exercise it by surrendering this Warrant Certificate, with the form of election
to purchase set forth hereon properly completed and executed, together with
payment of the Warrant Price at the office or agency of the Warrant Agent,
Capital Alliance Advisors, Inc., 50 California Street, Suite 2020, San
Francisco, California 94111. The Warrant Price shall be paid by cash or bank
check.
198
<PAGE> 13
FORM OF SUBSCRIPTION
[TO BE SIGNED ONLY UPON EXERCISE OF WARRANT]
To ________________________:
The undersigned hereby irrevocably elects to exercise Warrant(s)
represented by this Warrant Certificate, and to purchase the Shares issuable
upon exercise of such Warrants, and requests that certificates for such Shares
shall be issued in the name of, and cash for any fractional shares paid to,
_________________ whose address is _____________________.
By checking this box [ ], the undersigned requests that the
Shares be issued in Certificate form.
Dated:_________________, 19____
___________________________________________________________
(Signature must conform in all respects to name of holder as
specified on the fact of the Warrant)
___________________________________________________________
Address
___________________________________________________________
FORM OF ASSIGNMENT
[TO BE SIGNED ONLY UPON TRANSFER OF WARRANT]
For value received, the undersigned hereby sells, assigns and
transfers unto _____________ Warrants represented by the within Warrant
Certificate, together with all right, title and interest therein, and do hereby
irrevocably constitute and appoint Capital Alliance Advisors, Inc., Attorney to
transfer said Warrants on the books of the within-named Trust, with full power
of substitution in the premises.
Dated:_________________, 19____
___________________________________________________________
(Signature must conform in all respects to name of holder as
specified on the fact of the Warrant)
199
<PAGE> 1
EXHIBIT 10.1
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (the "Agreement") is made
and entered into this 31st day of May, 1996, by and between CAPITAL ALLIANCE
INCOME TRUST, a Delaware corporation (the "Corporation"), and CAPITAL ALLIANCE
ADVISORS INC., a California corporation (the "Manager").
RECITALS
A. The Corporation intends to elect and be taxed and
to qualify as a real estate investment Trust ("REIT") under the Internal Revenue
Code of 1986, as amended (the "Code"), and to make a public offering of
securities to investors (the "Shareholders").
B. The Manager, through its management and staff and
that of its affiliates, is experienced in the areas of mortgage banking, real
estate finance and investor relations and possesses adequate mortgage banking,
legal and accounting personnel to perform investment advisory and management
services for the Corporation.
C. The Corporation desires to avail itself of the
experience, advice and assistance of the Manager and to have the Manager
undertake the duties and responsibilities hereinafter set forth.
D. The Manager is willing to render such services for
the compensation and in accordance with the terms and conditions hereinafter set
forth.
NOW THEREFORE, in consideration of the mutual promises
and covenants herein contained, the parties agree as follows:
I. DEFINITIONS
For purposes of this Agreement, capitalized terms
herein shall have such meaning as set forth herein or in the Corporation's
Certificate of Incorporation and Bylaws.
II. GENERAL POWERS AND DUTIES OF THE MANAGER
Subject to Section III herein and to the supervision
of the Board of Directors of the Corporation (hereinafter referred to as the
"Directors"), and to the extent so directed by the Board of Directors, the
Manager agrees to use its best efforts to perform the following duties:
2.01. Investment Advice. The Manager shall serve as
the Corporation's consultant in connection with all investments of the
Corporation and in so doing shall:
(a) Present to the Corporation a continuing and
suitable investment program and opportunities to make investments
consistent with the investment objectives and policies of the
Corporation as such objectives and policies are set forth in the
By-laws of the Corporation and as they are modified by the
Directors from time to time;
(b) Furnish to the Directors, as requested,
advice regarding the making of, investment in, origination of,
and administration and disposition of Home Equity Loans and the
development, construction, acquisition, holding and disposition
of interests in real estate and temporary
200
<PAGE> 2
investments and establish and maintain suitable underwriting and
investment criteria therefor, respectively;
(c) Furnish to the Directors, as requested,
reports and provide research, including economic and statistical
data regarding the Corporation's investment policies and
investment portfolio;
(d) Assist the Directors in periodically
evaluating the investment objectives and policies of the
Corporation and in making such modifications thereto as the
Manager and the Directors deem favorable to the Corporation's
Shareholders.
2.02. Management Activities. The Manager shall manage
the day-to-day operations of the Corporation and in so doing shall:
(a) Supervise the maintainance of all books,
accounts, and records of the Corporation;
(b) Supervise the accounting, auditing and legal
affairs of the Corporation and prepare the Corporation's annual
report and other periodic reports for delivery to the
Shareholders;
(c) Assist the Corporation in complying with the
relevant federal and state securities laws and federal and state
laws governing lending and the ownership and operation of real
property;
(d) Supervise investor relations, public
relations and relations with the investment community;
(e) Negotiate, manage and monitor the
Corporation's borrowings;
(f) Investigate, select, and conduct relations
with third parties and, as necessary, negotiate contracts with,
retain, and supervise services performed by such parties in
connection with investments which have been or may be acquired or
disposed of by the Corporation;
(g) Hire, as appropriate, and supervise
independent contractors, including the Manager or an Affiliate of
the Manager, to identify, screen, evaluate, negotiate, structure,
document and, if applicable, renegotiate Home Equity Loans made
and acquired by the Corporation in accordance with the
Corporation's investment policies, approve the selection of
appraisers, obtain or cause to be obtained Appraisals, title
reports, opinions of counsel with other information and
documentation in accordance therewith;
(h) Hire, as appropriate, and supervise
independent contractors, including the Manager or an Affiliate of
the Manager, to service and supervise the servicing of all Home
Equity Loans, including enforcement of the Corporation's rights
thereunder;
(i) Invest or reinvest money of the Corporation;
(j) Perform or supervise the performance of
other administrative functions in connection with the management
of the Corporation as may be agreed upon by the Manager and the
Directors.
2.03. Home Equity Loan Activities. Without prior
approval of the Directors, the Manager shall or, as appropriate, shall hire an
independent contractor (including an Affiliate of the Manager) to negotiate and
commit the Corporation to make, acquire, participate in and otherwise invest in
Home Equity Loans, including shared funding arrangements with other financial
institutions (including Affiliates of the Manager), as described in and
consistent with the investment objectives and policies of the Corporation and on
such terms as the Manager deems favorable to the Corporation
201
<PAGE> 3
and its Shareholders; provided, the Manager shall obtain prior to committing the
Corporation to make or invest in and closing any Home Equity Loan an Appraisal
for the underlying property indicating that the ratio of the principal amount of
the Home Equity Loan and of all other loans on the property equal to or senior
in priority when compared to the appraised value of the property does not exceed
75% Combined Loan-to-Value.
2.04. Consultation and Advice. In addition to the
services described above, the Manager shall consult with the Directors, and
shall, at the request of the Directors or the officers of the Corporation,
furnish advice and recommendations with respect to other aspects of the business
and affairs of the Corporation. In general, the Manager shall inform the
Directors of any factors which come to its attention which would influence the
policies of the Corporation, except to the extent that giving such information
would involve a breach of fiduciary duty.
III. SPECIAL CONSIDERATIONS
AND RESTRICTIONS ON THE MANAGER
In accordance with the Corporation's Bylaws and
notwithstanding any other provision of this Agreement, the Manager's activities
concerning the Corporation shall be restricted as follows:
3.01. Temporary Investments by Manager or Affiliates
on Behalf of the Corporation. The Manager or an Affiliate may make or acquire a
Home Equity Loan in its own name and temporarily hold such investment for the
purpose of facilitating the making of such investment by the Corporation,
provided that any such investment is acquired by the Corporation at a cost no
greater than the cost of such investment to the Manager or its Affiliate plus
carrying costs, and provided there is no benefit to the Manager or its Affiliate
arising out of such transaction other than compensation otherwise permitted by
paragraphs 4.04 and 4.05 herein or provided for in separate contracts between
such Affiliate or Affiliates and the Corporation.
3.02. Transactions with the Manager, Affiliates or
Directors. The Manager or its affiliates may buy or sell, on behalf of the
Corporation, Home Equity Loans, or real property or interests therein from or to
itself, its Affiliates in the ordinary course of business and at no more nor
less than par. Joint or co-investments with the Manager or its Affiliates
permitted under paragraph 3.03 shall not be deemed a sale prohibited by this
Agreement. The Manager shall not borrow money from the Corporation. The Manager
shall not borrow money, on behalf of the Corporation, from itself, its
Affiliates or any Trustee of the Corporation unless a majority of the Directors
approve the transaction as being fair, competitive, and commercially reasonable
and no less favorable to the Corporation than loans between unaffiliated lenders
and borrowers under the same circumstances; provided, however, that such
prohibitions shall not preclude allocations of expense provided for under
Section 4.08(d).
3.03. Joint Investments and Activities. The Manager,
on behalf of the Corporation, may invest in joint ventures, participations and
co-investments with affiliates of the Manager and/or with investment programs
sponsored by the Manager or its Affiliates which make or acquire Home Equity
Loans or residential mortgage loans or which conduct a wholesale residential
mortgage banking business.
3.04. Resolution of Conflicting Opportunities. Unless
the Board of Directors determines otherwise, if the Corporation has proceeds
available for investment in competition with other privately or publicly-held
entities affiliated with the Manager which invest in Home Equity Loans, the
Manager shall review the investment portfolio of each entity and decide which
entity will make the investment on the basis of such factors, among others, as
the size of the investment, anticipated cash flow, yield, portfolio
diversification, type and location of the property on which the Home Equity Loan
will be made, proposed loan or acquisition terms, the amount of funds available
and the length of time such funds have been available for investment. If the
investment is deemed generally suitable for two or more such entities, the
Manager shall make or acquire such investments on a basis of the entity having
sufficient uncommitted funds available for investment for the longest period of
time.
3.05. Investment Company Act of 1940. In accordance
with the Directors' intent to conduct the operations of the Corporation so that
it will not be subject to regulation under the Investment Company Act of 1940,
the Manager shall
202
<PAGE> 4
monitor the Corporation's investments and forego any investments which would
cause the Corporation to come within the definition of an investment company
under such Act.
3.06. REIT Qualification. At such time as the
Corporation elects to be taxed as a REIT and anything else in this Agreement to
the contrary notwithstanding, the Manager shall use its best efforts to refrain
from any action which, in its sole judgment made in good faith or in the
judgment of the Directors of which the Manager has written notice, would
adversely affect the status of the Corporation as a real estate investment trust
as defined and limited in Sections 856-860 of the Internal Revenue Code. The
Manager, however, makes no commitment or representation that the Corporation
will qualify as a real estate investment trust. Moreover, in the event that the
Corporation does not so qualify, neither the Manager nor any of its officers,
directors, or employees shall be liable for such failure to the Corporation, its
Shareholders, or any other person. At all times, the Manager shall use its best
efforts to refrain from any action which would violate any law, rule, regulation
or statement of policy of any governmental body or agency having jurisdiction
over the Corporation or over its business and securities, or which would
otherwise not be permitted by the Corporation's Bylaws.
3.07. Other Investment Restrictions. In addition to
the restrictions otherwise contained in this Section III and in the Bylaws, of
the Corporation, the Manager shall not, as agent of the Corporation make
investments in contravention of the Corporation's investment policy as set forth
in Article V of the Corporation's Bylaws.
3.08. Bank Accounts. The Manager, at the expense of
the Corporation, may establish and maintain one or more bank accounts in its own
name, and may collect and deposit into any such account or accounts, and
disburse from any such account or accounts, any money on behalf of the
Corporation, under such terms and conditions as the Directors may approve,
provided that no funds in any such account shall be commingled with funds of the
Manager; and the Manager shall from time to time render appropriate accounting
of such collections and payments to the Directors and to the auditors of the
Corporation.
IV. RIGHTS AND DUTIES OF THE CORPORATION
4.01. Supervision by Directors. The Corporation,
through its Directors, shall supervise, as provided in this Agreement, and the
Bylaws, or otherwise as they in their sole discretion deem necessary or
desirable, the lending and investment activities of the Corporation and shall
meet at least quarterly to:
(a) Review all Home Equity Loans made or
acquired by the Manager for the Corporation pursuant to Sections
2.02 and 2.03 since their previous meeting;
(b) Review the status of existing Home Equity
Loans and any other investments;
(c) Act upon matters submitted to the
Corporation by the Manager which under this Agreement or the
Bylaws require their approval.
4.02. Information Furnished Manager. The Directors
shall at all times keep the Manager fully informed with regard to the investment
policy and lending criteria of the Corporation, the capitalization policy of the
Corporation and generally their then current intentions as to the future of the
Corporation. The Corporation shall furnish the Manager with a certified copy of
all financial statements, a signed copy of each report prepared by independent
certified public accountants and such other information with regard to the
Corporation's affairs as the Manager may from time to time reasonably request.
4.03. Indemnification. The Corporation shall indemnify
and hold harmless the Manager, its officers, directors, shareholders and
employees, for losses or claims arising out of the performance of its
obligations under this Agreement as provided in the Corporation's Certificate of
Incorporation and Bylaws. However, the Corporation may indemnify the Manager and
such persons for settlements and related expenses or lawsuits alleging
securities law violations, and for expenses incurred in successfully defending
such lawsuits, provided that a court either (i) approves the settlement
203
<PAGE> 5
and finds that indemnification of the settlement and related costs should be
made, or (ii) approves indemnification and/or litigation costs if a successful
defense is made.
4.04. Regular Manager Compensation. The Regular
Management fee payable monthly hereunder shall be equal to one-twelfth (1/12) of
one percent (1%) of the Gross Mortgage Assets of the Corporation plus
one-twelfth (1/12) of one-half percent (1/2%) of the book value of the
non-mortgage assets of the Corporation. "Gross Mortgage Assets" shall mean for
any month the book value of the mortgages, mortgage-related investments and real
property of the Corporation computed at the end of the month.
4.05. Compensation for Additional Services and
Payment.
(a) If and to the extent that the Corporation shall
request the Manager, or any director, officer, partner or employee of the
Manager, or any Affiliate of the Manager, to render services for the Corporation
or for a subsidiary of the Corporation in which it owns a majority economic
interest other than those required to be rendered by the Manager hereunder, or
under the Home Equity Loan Origination and Loan Servicing Agreement such
additional services, if performed, will be the subject of a separate agreement
and will be compensated separately on terms to be agreed upon between such party
and the Corporation or its said subsidiary from time to time.
(b) The Corporation may make advances to the Manager
and/or its Affiliates of compensation payable under Section 4.04, provided that
the Manager will, promptly on demand by the Corporation, refund to the
Corporation the amount of such advances to the extent, if any, that such
compensation is not ultimately earned. The amounts of such advances will be
adjusted to reflect prepayment of the fees.
4.06. Operating Expense. The Corporation, through its
Directors, retains the right to review, from time to time but at least annually,
the reasonableness of all fees, expenses and compensation paid or due the
Manager and its Affiliates.
4.07. Expenses of the Manager. Without regard to the
amount of compensation received hereunder by the Manager, the Manager, except as
otherwise provided herein, shall bear, or shall cause independent contractors
hired for the Corporation to bear, the following expenses:
(a) employment expenses of the controlling
officers and directors of the Manager, except as provided in
Section 4.08 hereof;
(b) rent, telephone, utilities, office furniture
and furnishings and other office expenses incurred by or
allocable to the Manager for its own benefit and account and not
that of the Corporation; and
(C) miscellaneous administrative and other
expenses of the Manager not relating to the performance by the
Manager of its functions hereunder.
4.08. Expenses of the Corporation. Except as expressly
otherwise provided in this Agreement, the Corporation shall pay all its expenses
not expressly assumed by the Manager, and without limiting the generality of the
foregoing it is specifically agreed that the following expenses of the
Corporation shall be borne by the Corporation and not by the Manager:
(a) the cost of money borrowed by the
Corporation;
(b) taxes on income and taxes and assessments on
real property and all other taxes applicable to the Corporation;
204
<PAGE> 6
(c) legal, auditing, accounting, underwriting,
brokerage, listing, registration and other fees and printing,
engraving and other expenses and taxes incurred in connection
with the organization of the Corporation and the issuance,
distribution, transfer, registration and listing of the
Corporation's securities, including compensation and direct
expenses of officers and employees of the Manager and affiliates
while directly engaged in such activities on behalf of the
Corporation;
(d) except as provided in Section 4.07 hereof,
all ordinary and necessary expenses incurred with respect to and
allocable to the prudent operation and business of the
Corporation, including without limitation fees, and other costs,
taxes and expenses paid to or for the benefit of Directors. The
amounts charged to the Corporation shall not exceed their cost to
the Manager or its Affiliates and shall not exceed those which
the Corporation would be required to pay to independent parties
for comparable rent, goods, or materials. The Corporation's costs
for services and goods provided by the Manager to the Corporation
shall be based upon the cost thereof to the Manager and the
actual compensation (including employment taxes and benefits) of
Persons (other than controlling officers of the Manager or its
Affiliates) involved plus an appropriate share of overhead
allocable to each Person with respect to the services of such
Persons rendered for the benefit of and on the business or
affairs of the Corporation.
(e) except as otherwise specifically provided in
the Home Equity Loan Origination and Servicing Agreement entered
into concurrently herewith, fees and expenses paid to independent
contractors, appraisers, consultants, managers and other agents
retained by or on behalf of the Corporation (including Persons
who may also be officers or employees or Affiliates of the
Manager) for, and expenses directly connected with the
origination and acquisition, servicing, financing, refinancing,
disposition and ownership of Home Equity Loans or other interests
in real estate or other property (including insurance premiums,
legal services, property management, brokerage and sales
commissions (except expenses to be borne by the Manager pursuant
to Section 4.07 hereof);
(f) except as otherwise specifically provided in
the Home Equity Loan Origination and Servicing Agreement entered
into concurrently herewith, expenses of servicing and managing
Home Equity Loans and equity real estate interests;
(g) insurance as required by the Directors
(including Directors' liability insurance);
(h) the expenses of organizing, revising,
amending, and converting to a trust, corporation or REIT, or
modifying or terminating the Corporation;
(i) expenses connected with payments of
dividends or interest or distributions in cash or any other form
made or caused to be made by the Directors to holders of
securities of the Corporation;
(j) all expenses connected with communications
to holders of securities of the Corporation and the other
bookkeeping and clerical work necessary in maintaining relations
with holders of securities, including the cost of printing and
mailing certificates for securities and proxy solicitation
materials and reports to holders of the Corporation's securities;
(k) the cost of any accounting, statistical or
bookkeeping equipment necessary for the maintenance of the books
and records of the Corporation;
(l) transfer agent's, registrar's, dividend
disbursing agent's, dividend reinvestment plan agent's and
indenture Trustee's fees and charges;
205
<PAGE> 7
(m) legal, accounting and auditing fees and
expenses not included in (c) and (e) of this Section 4.08; and
(n) other ordinary and necessary expenses of the
business and affairs of the Corporation, other than those
allocable to the Manager under Section 4.07, above.
The Corporation shall reimburse the Manager or its
Affiliates for the cost of rent, goods or materials furnished or advanced by it
for the benefit of the Corporation and for services rendered for the benefit of
the Corporation based upon the compensation of the persons (other than
controlling officers ) involved and an appropriate share of overhead allocable
to such person. The amounts charged to the Corporation by the Manager and its
Affiliates shall be at its cost and shall not exceed those which the Corporation
would be required to pay to independent parties for comparable rent, materials,
goods or services.
V. TERM; TERMINATION OF AGREEMENT
5.01. Term. This Agreement shall commence on the
Closing Date and shall continue in force until December 31, 1998, and thereafter
it may be renewed bi-annually, subject to the approval of the majority of the
Directors, and to ratification of such approval by the Shareholders. Notice of
non-renewal shall be given in writing by the Directors to the Manager not less
than 6 months before the expiration of the term of this Agreement or of any
extension thereof and in the absence of such notice of non-renewal such term or
any extension thereof shall be automatically extended for an additional term of
two (2) years, subject to approval by the Shareholders of the Corporation as
provided in the Bylaws of the Corporation. Notwithstanding any other provision
to the contrary, this Agreement may be terminated for any reason by the action
of the Directors with the approval of such action by the shareholders holding a
majority of the voting power of the Corporation or by the shareholders holding a
majority of the voting power of the Corporation without action by the Directors
upon 120 days' written notice by the Corporation to the Manager or by the
Manager upon 120 days' written notice to the Corporation. "Closing Date" means
the date the Corporation's initial public offering of common stock becomes
effective with the Securities Exchange Commission. The Advisory Agreement
between Manager and the Corporation dated January 2, 1996 shall be automatically
terminated upon the commencement of the term hereunder.
5.02. Cancellation. Either party may cancel this
Agreement immediately for cause by sending written notice thereof to the other
party. The following events constitute cause for purposes of cancellation:
(a) If either party materially breaches this
Agreement; or
(b) If the Manager violates any provisions of
this Agreement and, after written notice thereof fails to cure
such violation within 60 days or fails to commence and diligently
pursue such cure if such cure cannot reasonably be effected
within such 60 days; or
(c) If the Manager is adjudged bankrupt or
insolvent by a court or competent jurisdiction or has appointed
by order of a court of competent jurisdiction a receiver,
liquidator or Trustee of all or substantially all of its property
by reason of the foregoing; or
(d) If the Manager (i) voluntarily petitions for
bankruptcy or reorganization under the federal bankruptcy laws,
or for relief from its creditors under any law; (ii) consents to
the appointment of a receiver for itself or for all or
substantially all of its property; (iii) makes a general
assignment for the benefit of its creditors; or (iv) admits in
writing its inability to pay its debts generally as they become
due.
206
<PAGE> 8
VI. DUTIES OF PARTIES UPON
TERMINATION OR CANCELLATION
6.01. Action Upon Termination. From and after the
effective date of termination of this Agreement, pursuant to Sections 5.01 and
5.02 hereof, the Manager, except as provided in Section 6.03, shall not be
entitled to compensation for further services hereunder but shall be paid all
compensation and reimbursed all expenses accruing to the date of termination,
including compensation which may have been earned but deferred under hereunder.
The Manager shall forthwith upon such termination:
(a) Pay over to the Corporation all moneys
collected and held for the account of the Corporation pursuant to
this Agreement, after deducting any accrued compensation and
reimbursement for its expenses to which it is then entitled;
(b) Deliver to the Directors a full accounting,
including a statement showing all payments collected by it and a
statement of all moneys held by it, covering the period following
the date of the last accounting furnished to the Directors;
(c) Deliver to the Directors all property and
documents of the Corporation then in the custody of the Manager;
and
(d) Cooperate with the Directors to provide an
orderly management transition.
6.02. Change of Name. Upon termination of this
Agreement by either party, the Directors shall within thirty (30) days of such
termination cease the use of the name "Capital Alliance" in connection with the
operation of the Corporation and forthwith cause the name of the Corporation to
be changed to a name (i) not containing the name "Capital Alliance," or any
approximations or abbreviations thereof and (ii) sufficiently dissimilar to such
name as to be unlikely to cause confusion with such name. If necessary to meet
the time limits imposed herein, the Corporation shall adopt and use a fictitious
name meeting the foregoing requirements in the event it has not effected such
change of name within the specified times. Upon the failure of the Corporation
to carry out the provisions of this Section 6.02 after demand by the Manager,
the Manager shall be entitled to the entry of a temporary restraining order and
a preliminary and/or permanent inunction to require the performance by the
Corporation of its obligations hereunder, which orders and/or injunctions may be
issued by the Court having jurisdiction on an ex parte basis.
6.03. Compensation. In the event of cancellation by
either party for cause as defined in Article V, the Corporation shall compensate
and reimburse the Manager, in accordance with Article IV, for services performed
and expenses, and shall reimburse the Manager for expenditures made prior to the
date of the termination of this Agreement.
In the event this Agreement is terminated by the Trust
without cause, or in the extent this Agreement is not renewed by the Trust
without cause, the Trust, in addition to its obligations under Article IV and
this Article VI, shall pay the Manager a termination or non renewal fee
determined by independent appraisals equal to the fair market value to Manager
of this Management Agreement assuming that it was newly renewed for a period of
two (2) years as of the effective date of such termination. Such appraisal shall
be conducted by a nationally-recognized appraisal firm mutually agreed upon by
the parties and the costs of such appraisal shall be borne equally by the
parties. If the parties are unable to agree upon such appraisal firm within 30
days following notice of termination or, in the event of non-renewal, the
termination date, then each party shall as soon as reasonably practicable, but
in no event more than 45 days following notice of termination or, in the event
of non-renewal, the termination date, choose a nationally-recognized independent
appraisal firm to conduct an appraisal. In such event, (i) the termination fee
shall be deemed to be the average of the appraisals as conducted by each party's
chosen appraiser and (ii) each party shall pay the costs of its appraiser so
chosen. Any appraisal conducted hereunder shall be performed no later than 45
days following selection of the appraiser or appraisers.
207
<PAGE> 9
VII. MISCELLANEOUS
7.01. Nonexclusive Nature of Services. The time and
resources of the Manager will not be dedicated exclusively to the Corporation.
Subject to the restrictions and authorizations contained in Article III hereof
and the Bylaws, the Manager and its Affiliates may engage in mortgage real
estate or non-real estate related activities for or on behalf of other entities,
provided the Manager devotes sufficient time and resources to the Corporation so
as to discharge its obligations under this Agreement.
7.02. Assignment. The Corporation may terminate this
Agreement in the event of its assignment by the Manager unless such assignment
is to a corporation or other person which controls, is controlled by, or is
under common control with the Manager, or to a corporation, association, Trust
or other successor organization which may take over the property and carry on
the affairs of the Manager. Such an assignment or any other assignment of this
Agreement by the Manager shall bind the assignee hereunder in the same manner as
the Manager is bound hereunder. This Agreement shall not be assignable by the
Corporation without the consent of the Manager, except in the case of assignment
by the Corporation to a corporation, association, Trust or other organization
which is a successor to the Corporation. Such successor shall be bound hereunder
and by the terms of said assignment in the same manner as the Corporation is
bound hereunder.
7.03. Amendments. This Agreement shall not be changed,
modified, terminated or discharged in whole or in part except by an instrument
in writing signed by both parties hereto, or their respective successors or
assigns, or otherwise as provided herein.
7.04. Miscellaneous. The Manager assumes no
responsibility under this Agreement other than to render the services called for
hereunder in good faith, and shall not be responsible for any action of the
Directors in following or declining to follow any advice or recommendations of
the Manager. Neither the Manager not its shareholders, directors, officers or
employees shall be liable to the Corporation, the Directors, the holders of
securities of the Corporation or to any successor or assign of the Corporation
except by reason of acts constituting bad faith, willful misfeasance, gross
negligence or reckless disregard of their duties.
7.05. Notices. Any notice, report, or other
communication required or permitted to be given hereunder shall be in writing
and shall be given: (a) by delivery in person or by facsimile transmissions to
an officer of the party to whom it is addressed or (b) by mailing to the party
to whom it is addressed at the following address:
The Directors and the Corporation:
Capital Alliance Income Trust
50 California Street, Suite 2020
San Francisco, CA 94111
The Manager:
Capital Alliance Advisors Inc.
50 California Street, Suite 2020
San Francisco, CA 94111
Either party, by notice of aforesaid, may designate a different address or
addresses for notices, reports, or other communications intended for it.
7.06. Headings. The section and paragraph headings
used herein have been inserted for convenience or reference only and do not
constitute matters to be considered in interpreting this Agreement.
7.07. Arbitration. The parties hereto agree that any
controversy or claim arising out of or relating to this Agreement shall be
submitted to binding arbitration, in accordance with the rules, then obtaining,
of the American
208
<PAGE> 10
Arbitration Association, with venue in the City and County of San Francisco,
California and judgment on the award rendered may be entered in any court having
jurisdiction.
7.08. Governing Law. This Agreement shall governed by
the laws of the State of California.
IN WITNESS WHEREOF, the Corporation and the Manager have executed
this Agreement as of the day and year first above written.
CAPITAL ALLIANCE INCOME TRUST
a Delaware corporation
By:
---------------------------------------
Thomas B. Swartz, Chairman
CAPITAL ALLIANCE ADVISORS, INC.,
a California corporation
By:
---------------------------------------
Dennis R. Konczal, President
209
<PAGE> 1
EXHIBIT 10.2
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made as of
this ___ day of __________, 1996, by and between CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST, a Delaware corporation (the "Trust"), and
_______________________________ ("Indemnitee").
WHEREAS, the Trust and Indemnitee recognize the increasing
difficulty in obtaining directors' and officers' liability insurance, the
significant increases in the cost of such insurance and the general reductions
in the coverage of such insurance; and
WHEREAS, the Trust and Indemnitee further recognize the
substantial increase in corporate litigation in general, subjecting officers and
directors to expensive litigation risks at the same time as the availability and
coverage of liability insurance has been severely limited; and
WHEREAS, Indemnitee does not regard the current protection
available as adequate under the present circumstances, and Indemnitee and other
officers and directors of the Trust may not be willing to continue to serve as
officers and directors without additional protection; and
WHEREAS, the Trust desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as officers and
directors of the Trust and to indemnify its officers and directors so as to
provide them with the maximum protection permitted by law;
NOW, THEREFORE, the TRUST AND INDEMNITEE HEREBY AGREE as follows:
1. Indemnification. The Trust shall indemnify, and advance
expenses to Indemnitee as provided in this Agreement and to the fullest extent
permitted by applicable law in effect on the date hereof and to such greater
extent as applicable law may thereafter from time to time permit. The rights of
Indemnitee provided under the preceding sentence shall include, but shall not be
limited to, the rights set forth in the other sections of this Agreement. For
purposes of this Agreement, the term "expenses" shall include all reasonable
attorneys' fees, retainers, court costs, transcript costs, fees of experts,
witness fees, travel expenses, duplicating costs, printing and binding costs,
telephone charges, postage, delivery service fees, and all other disbursements
or expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, or being or
preparing to be a witness in any proceeding, including any action, suit,
arbitration, alternate dispute resolution mechanism, investigation,
administrative hearing or any other proceeding whether civil, criminal,
administrative or investigative, whether or not initiated prior to the effective
date hereof.
(a) Third Party Proceedings. The Trust shall
indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding, whether
civil, criminal, administrative or investigative (other that an action by or in
the right of the Trust) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Trust, or any subsidiary of the
Trust, by reason of any action or inaction on the part of Indemnitee while an
officer, director, employee or agent, or by reason of the fact that Indemnitee
is or was serving at the request of the Trust as a director, officer, employee
or agent of another corporation, partnership, joint venture, Trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement (if such settlement is approved in advance by the
Trust, which approval shall not be unreasonably withheld) actually and
reasonably incurred by Indemnitee in connection with such action or proceeding,
if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed
to be in or not opposed to the best interests of the Trust, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe
Indemnitee's conduct was unlawful. The termination of any action or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner which Indemnitee reasonably believed to be
in or not opposed to the best interests of the Trust, or, with respect to any
criminal action or proceeding, had no reasonable cause to believe that
Indemnitee's conduct was unlawful.
210
<PAGE> 2
(b) Proceedings By or in the Right of the Trust.
The Trust shall indemnify Indemnitee if Indemnitee was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
proceeding by or in the right of the Trust or any subsidiary of the Trust to
procure a judgment in its favor by reason of the fact that Indemnitee is or was
a director, officer, employee or agent of the Trust, or any subsidiary of the
Trust, by reason of any action or inaction on the part of Indemnitee while an
officer, director, employee or agent, or by reason of the fact that Indemnitee
is or was serving at the request of the Trust as a director, officer, employee
or agent of another corporation, partnership, joint venture, Trust or other
enterprise, against expenses (including attorneys' fees) and, to the fullest
extent permitted by law, amounts paid in settlement, in each case to the extent
actually and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or proceeding, if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Trust and its shareholders, except that no indemnification
shall be made in respect of any claim, issue or matters to which Indemnitee
shall have been adjudged to be liable to the Trust in the performance of
Indemnitee's duty to the Trust and its shareholders unless and only to the
extent that the court in which such action or proceeding is or was pending shall
determine upon application that, in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity for expenses and then
only to the extent that the court shall determine.
2. Agreement to Serve. Indemnitee agrees to serve in the capacity
set forth on the signature page of this Agreement. Indemnitee may, at any time
and for any reason, resign from such position (subject to any other contractual
obligation or any obligation imposed by operation of law). The Trust shall have
no obligation under this Agreement to continue Indemnitee in any position with
the Trust.
3. Expenses: Indemnification Procedure.
(a) Advance of Expenses. The Trust shall advance all expenses
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action or proceeding referenced in Section 1
hereof (but not amounts actually paid in settlement of any such action or
proceeding). Indemnitee hereby undertakes to repay such amounts advanced only
if, and to the extent that, it shall ultimately be determined that Indemnitee is
not entitled to be indemnified by the Trust as authorized hereby. The advances
to be made hereunder shall be paid by the Trust to Indemnitee within ten (10)
days following delivery of a written request therefor by Indemnitee to the
Trust.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to his right to be indemnified under this Agreement, give
the Trust notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Trust shall be directed to the Chief Executive Officer
of the Trust at the address shown on the signature page of this Agreement (or
such other address as the Trust shall designate in writing to Indemnitee).
Notice shall be deemed received three business days after the date postmarked if
sent by domestic certified or registered mail, properly addressed; otherwise
notice shall be deemed received when such notice shall actually be received by
the Trust. In addition, Indemnitee shall give the Trust such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) Procedure. Any indemnification provided for in Section 1
shall be made no later than forty-five (45) days after receipt of the written
request of Indemnitee. If a claim under this Agreement, under any statute, or
under any provision of the Trust's Articles of Incorporation or Bylaws providing
for indemnification, is not paid in full by the Trust within forty-five (45)
days after a written request for payment thereof has first been received by the
Trust, Indemnitee may, but need not, at any time thereafter bring an action
against the Trust to recover the unpaid amount of the claim and, subject to
Section 13 of this Agreement, Indemnitee shall also be entitled to be paid for
the expenses (including attorneys' fees) of bringing such action. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in connection with any action or proceeding an advance of its
final disposition) that Indemnitee has not met the standards of conduct which
make it permissible under applicable laws for the Trust to indemnify Indemnitee
for the amount claimed, but the burden of proving such defense shall be on the
Trust, and Indemnitee shall be entitled to receive interim payments of expenses
pursuant to Subsection 3(a) unless and until such defense may be finally
adjudicated by court order or judgment from which no further right of appeal
exists. It is the parties' intention that, if the Trust contests Indemnitee's
right to indemnification, the question of Indemnitee's right to indemnification
shall be for the court to decide, and neither the failure of the Trust
(including its Board of Directors, any committee or subgroup of the Board of
Directors, independent legal counsel, or its shareholders) to have made a
determination that indemnification of Indemnitee is proper in circumstances
211
<PAGE> 3
because Indemnitee has met the applicable standard of conduct required by
applicable law, nor an actual determination by the Trust (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its shareholders) that Ind emnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the
receipt of a notice of a claim pursuant to Section 3(b) hereof, the Trust has
director and officer liability insurance in effect, the Trust shall give prompt
notice of the commencement of such proceeding to the insurers in accordance with
the procedures set forth in the respective policies. The Trust shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Trust
shall be obligated under Section 3(a) hereof to pay the expenses of any
proceeding against Indemnitee, the Trust, if appropriate, shall be entitled to
assume the defense of such proceeding, with counsel approved by Indemnitee,
which approval shall not be unreasonably withheld, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Trust, the Trust will not be liable to Indemnitee under this Agreement
for any fees of counsel subsequently incurred by Indemnitee with respect to the
same proceeding, provided that (i) Indemnitee shall have the right to employ his
counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the
employment of counsel by Indemnitee has been previously authorized by the Trust,
(B) Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Trust and Indemnitee in the conduct of any such defense or
(C) the Trust shall not, in fact, have employed counsel to assume the defense of
such proceeding, then the fees and expenses of Indemnitee's counsel shall be at
the expense of the Trust.
4. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. Notwithstanding any other provision of
this Agreement, the Trust hereby agrees to indemnify Indemnitee to the fullest
extent permitted by law, notwithstanding that such indemnification is not
specifically authorized or is otherwise prohibited by the other provisions of
this Agreement, the Trust's Articles of Incorporation, the Trust's Bylaws or by
statute. In the event of any change, after the date of this Agreement, in any
applicable law, statute or rule which expands the right of a Delaware
corporation to indemnify a member of its board of directors or an officer,
employee or agent, such changes shall be ipso facto, within the purview of
Indemnitee's rights and the Trust's obligations, under this Agreement. In the
event of any change in any applicable law, statute or rule which narrows the
right of a Delaware corporation to indemnify a member of its Board of Directors
or an officer, employee or agent, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification by this
Agreement shall not be deemed exclusive of any rights to which Indemnitee may be
entitled under the Trust's Articles of Incorporation, its Bylaws, any agreement,
any vote of shareholders or disinterested directors, the General Trust Law of
the State of Delaware, or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while holding such office. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity even
though he may have ceased to serve in such capacity at the time of any action or
other covered proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Trust for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by him in the investigation, defense, appeal or settlement of any civil
or criminal action or proceeding, but not, however, for the total amount
thereof, the Trust shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. Directors' and Officers' Liability Insurance. The Trust shall,
from time to time, make the good faith determination whether or not it is
practicable for the Trust to obtain and maintain a policy or policies of
insurance with reputable insurance companies providing the officers and
directors of the Trust with coverage for losses from wrongful acts, or to ensure
the Trust's performance of its indemnification obligations under this Agreement.
Among other considerations, the Trust will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
212
<PAGE> 4
policies of directors' and officers' liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Trust's
directors, if Indemnitee is a director; or of the Trust's officers, if
Indemnitee is not a director of the Trust but is an officer; or of the Trust's
key employees, if Indemnitee is not an officer or director but is a key
employee. Notwithstanding the foregoing, the Trust shall have no obligation to
obtain or maintain such insurance if the Trust determines in good faith that
such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Trust.
7. Severability. If any provision or provisions of this Agreement
shall be held to be invalid, illegal or unenforceable for any reason whatsoever:
(a) the validity, legality and enforceability of the remaining provisions of
this Agreement (including, without limitation, each portion of any section of
this Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby; and (b) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, each
portion of any section of this Agreement containing any such provision held to
be invalid, illegal or unenforceable, that is not itself invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable.
8. Exceptions. Except as provided in Section 4(a) hereof, the
Trust shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or
omissions or transactions from which a director may not be relieved of liability
under the General Trust Law of the State of Delaware;
(b) Claims Initiated by Indemnitee. To indemnify or advance
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except with respect
to proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under the
General Trust Law of the State of Delaware, but such indemnification or
advancement of expenses may be provided by the Trust in specific cases if the
Board of Directors has approved the initiation or bringing of such suit;
(c) Lack of Good Faith. To indemnify Indemnitee for any
expenses incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by Indemnitee
in such proceeding was not made in good faith or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
directors' and officers' liability insurance maintained by the Trust.
9. Effectiveness of Agreement. This Agreement shall be effective
as of the date set forth on the first page and shall apply to acts or omissions
of Indemnitee which occurred prior to such date if Indemnitee was an officer,
director, employee or other agent of the Trust, or was serving at the request of
the Trust as a director, officer, employee or agent of another corporation,
partnership, joint venture, Trust or other enterprise, at the time such act or
omission occurred.
10. Construction of Certain Phrases.
(a) For purposes of this Agreement, references to the "Trust"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees or
agents, so that if Indemnitee is or was a director, officer, employee or agent
of such constituent corporation, or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, Trust or other enterprise, Indemnitee
shall stand in the same position under the
213
<PAGE> 5
provisions of this Agreement with respect to the resulting or surviving
corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to
"other enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on Indemnitee with respect to an
employee benefit plan; and references to "serving at the request of the Trust"
shall include any service as a director, officer, employee or agent of the Trust
which imposes duties on, or involves services by, such director, officer,
employee or agent with respect to an employee benefit plan, its participants, or
beneficiaries.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. Successors and Assigns. This Agreement shall be binding upon
the Trust and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
13. Attorneys' Fees. In the event that any action is instituted
by Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, the court of competent
jurisdiction determines that each of the material assertions made by Indemnitee
as a basis for such action were not made in good faith or were frivolous. In the
event of an action instituted by or in the name of the Trust under this
Agreement or to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all court costs and expenses, including
attorneys' fees, incurred by Indemnitee in defense of such action (including
with respect to Indemnitee's counterclaims and crossclaims made in such action),
unless as a part of such action the court determines that each of Indemnitee's
material defenses to such action were made in bad faith or were frivolous.
14. Notice. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed duly
given (i) if delivered by hand and receipted for by the party addressee, on the
date of such receipt, or (ii) if mailed by domestic certified or registered mail
with postage prepaid, on the third business day after the date postmarked.
Addresses for notice to either party are as shown on the signature page of this
Agreement, or as subsequently modified by written notice.
15. Consent to Jurisdiction. The Trust and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.
16. Choice of Law. This Agreement shall be governed by and its
provisions construed in accordance with the laws of the State of California as
applied to contracts entered into and to be performed primarily within
California.
214
<PAGE> 6
IN WITNESS WHEREOF, The parties hereto have executed this
Agreement as of the date first above written.
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
a Delaware corporation
50 California Street, Suite 2020
San Francisco, CA 94111
By:
------------------------------
Its:
------------------------------
AGREED TO AND ACCEPTED:
INDEMNITEE:
- ---------------------------- ------------------------------------
(Type Name) (Capacity in which Employed by Trust)
- ----------------------------
(Signature)
- ---------------------------- ------------------------------------
(Address) (City, State, Zip)
215
<PAGE> 1
EXHIBIT 10.3
HOME EQUITY LOAN ORIGINATION SERVICES
AND LOAN SERVICING AGREEMENT
THIS AGREEMENT (the "Agreement") is made and
entered into this 31st day of May 1996, by and between CAPITAL ALLIANCE INCOME
TRUST, a Delaware corporation ("Corporation"), and CAPITAL ALLIANCE ADVISORS,
INC., a California corporation (herein referred to as "CAAI").
R E C I T A L S
A. The Corporation is in the business of
originating and investing in Home Equity Loans, and intends ultimately to
qualify as a real estate investment trust as defined in the Internal Revenue
Code of 1986, as the same may be amended or modified from time to time (which,
together with any regulations and rulings thereunder is hereafter called the
"Internal Revenue Code"), and to invest its funds in the investments permitted
in the Corporation's By-laws ("By-laws").
B. The Corporation desires to avail itself of
CAAI's experience, systems, advice, and assistance and to have CAAI, as its
exclusive agent, undertake the duties and responsibilities hereinafter set forth
relating to (1) the origination, negotiation, preparation and underwriting of
Home Equity Loan applications and to the commitment or placement of such Home
Equity Loans, and (2) to the servicing of Home Equity Loans on behalf of the
Corporation.
C. CAAI is willing to undertake to render such Home
Equity Loan origination, underwriting and servicing, subject to the supervision
of the Corporation's board of directors ("Board"), on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises
and of the mutual covenants herein contained, IT IS AGREED as follows:
1. Origination Duties of CAAI. CAAI undertakes to
use its best efforts to present to the Corporation, Home Equity Loan and other
investment opportunities of a character consistent with the Investment Policies
as set forth in the Corporation's By-laws and with the investment program of the
Corporation as the Corporation may adopt from time to time. CAAI may also
cooperate with other duly licensed loan brokers in the origination of Home
Equity Loans. In performance of this undertaking and consistent with the
provisions of the By-laws of the Corporation, CAAI shall:
(a) on behalf of the Corporation, investigate,
select, negotiate and conduct relations with borrowers,
mortgagors, brokers, builders and others regarding the making of
Home Equity Loans by the Corporation;
(b) solicit from individuals and from other
qualified submitting brokers, qualifying loan applications which
it shall review, process, and underwrite and, in accordance with
the Corporation's lending criteria for the making or acquisition
of Home Equity Loans. The commitment and funding of Home Equity
Loans by CAAI shall be subject to the approval of the Investment
Committee of the Advisor to the Corporation;
(c) consult with the Investment Committee for
advice and recommendations with respect to the making, acquiring
(by purchase, investment or otherwise), holding and disposition
(through sale or otherwise) of Home Equity Loans and other
investments consistent with the policies of the Corporation;
(d) obtain or provide to the Corporation such
services as may be required in underwriting and acquiring Home
Equity Loan investments for the Corporation;
216
<PAGE> 2
(e) from time to time or at any time requested
by the Board, make reports to the Board of its performance of the
foregoing services;
(f) obtain Appraisal reports, where appropriate,
on Home Equity Loan investments or contemplated investments of
the Corporation; and
(g) do all things necessary to assure its
ability to render the services contemplated herein.
2. Servicing Duties of CAAI. CAAI undertakes to use
its best efforts to service the Corporation's portfolio of Home Equity Loans. In
performance of this undertaking and consistent with the provisions of the
By-laws, CAAI shall:
(a) on behalf of the Corporation, collect
payments of principal and interest and other fees on the
Corporation's Home Equity Loans, remit such collections to the
Corporation and conduct relations with borrowers, with respect to
Home Equity Loans by the Corporation;
(b) contact and pursue appropriate collection
efforts with delinquent borrowers and supervise and coordinate
with counsel for the Corporation with respect to foreclosures and
bankruptcies in the event any loan default is not cured or
remedied;
(c) consult with the Corporation and furnish the
Corporation with advice and recommendations with respect to the
holding and disposition (through sale or otherwise) of Home
Equity Loans and other investments consistent with the policies
and provisions of the Corporation;
(d) obtain for and on behalf of the Corporation
and at the Corporation's expense such legal and foreclosure
services as may be required with respect to the Home Equity Loan
investments of the Corporation;
(e) from time to time or at any time requested
by the Corporation, make reports to the Corporation of its
performance of the foregoing services and the status of the
Corporation's Home Equity Loan portfolio;
(f) supervise and insure that borrowers obtain
appropriate property and casualty insurance for the benefit of
the Corporation on Home Equity Loan investments of the
Corporation; and
(g) inspect, list for sale with independent or
affiliated brokers, maintain appropriate property and casualty
insurance, and arrange for required property management services
with respect to real estate investments acquired as the result of
foreclosures of the Corporation's Home Equity Loans;
(h) do all things necessary to assure its
ability to render the services contemplated herein.
2. Exclusive Agency; No Partnership or Joint
Venture. The Corporation hereby appoints CAAI as its exclusive agent for the
origination, negotiation, preparation, underwriting, placement and commitment of
Home Equity Loans and for the servicing of its portfolio of Home Equity Loans,
subject to the terms and conditions set forth herein. The Corporation and CAAI
are not partners or joint venturers with each other and nothing herein shall be
construed so as to make them such partners or joint venturers or impose any
liability as such on either of them; provided, however, that with respect to
specific investments of the Corporation, nothing herein shall preclude CAAI or
its Affiliates from participating therein through co-investment or participation
arrangements or a joint venture, provided such co-investment, participation or
joint venture is approved by the Directors of the Corporation.
217
<PAGE> 3
3. Records. At all times, CAAI shall keep proper
books of account and records relating to services performed hereunder, which
books of account and records shall be accessible for inspection by the
Corporation at any time during ordinary business hours.
4. Information Furnished CAAI. The Corporation
shall at all times keep CAAI fully informed with regard to the investment policy
and lending criteria of the Corporation.
5. Definitions. All capitalized terms used herein
shall have the same meaning as that set forth in the Corporation's Certificate
of Incorporation and By-laws.
6. Compensation for Home Equity Loan Originating
and Servicing Services. As compensation for services rendered in connection with
the origination and/or purchasing and servicing of Home Equity Loans, hereunder,
CAAI shall be compensated monthly in an amount equal to one-twelfth (1/12) of
two percent (2%) annually of the Gross Mortgage Assets of the Corporation
computed at the end of each month. "Gross Mortgage Assets" shall mean for any
month the book value of the Mortgages and real property of the Corporation
computed at the end of the month. Such compensation shall be paid monthly. All
compensation for origination services paid by borrowers from the Corporation in
the form of "points" on Home Equity Loans originated hereunder, and as
compensation for services by CAAI rendered in connection with the investigation,
selection, origination and commitment (by purchase or investment) of a Home
Equity Loan, shall be paid to the Corporation out of escrow for each Trust Deed
Loan at the time it is funded. Mortgage brokerage commissions or "points" with
respect to the origination or purchase of Home Equity Loans of the Corporation
payable to other real estate or loan brokers who cooperate with, or submit loan
applications to the Corporation in such transaction shall be borne by the
borrower or the Corporation; CAAI shall be entitled to retain all miscellaneous
fees paid by borrowers for appraisal, documentation, processing, escrow,
inspection and other similar services in connection with the underwriting,
processing and funding of a Home Equity Loan. CAAI shall additionally be
entitled to receive ancillary fees related to the performance of servicing
functions, including late charges, returned check fees, assumption fees and
other incidental fees permitted by the mortgage loan documents. The Corporation
shall receive all prepayment charges and penalties.
7. Other Services. If and to the extent that the
Corporation shall request CAAI, or any director, officer, partner or employee of
CAAI or any Affiliate of CAAI to render services for the Corporation other than
those required to be rendered by CAAI hereunder or under other existing
agreements, such additional services, if performed, will be compensated
separately on terms to be agreed upon between such party and the Corporation
from time to time.
8. Advances. The Corporation may make advances to
CAAI and/or its Affiliates of compensation payable under Paragraph 6, provided
that CAAI will promptly, upon demand by the Corporation, refund to the
Corporation the amount of such advances to the extent, if any, that such
compensation is not ultimately earned. The amounts of such advances will be
adjusted to reflect prepayment of the fees.
9. Expenses of CAAI and the Corporation. Without
regard to the amount of compensation received hereunder by CAAI, CAAI shall bear
or, where appropriate, cause to be paid by borrowers under Home Equity Loans
originated hereunder, the following expenses:
(a) employment expenses of the officers and
directors and personnel of CAAI and the expenses, incidental to
the origination and servicing of Home Equity Loans hereunder;
provided, however, that travel expenses to inspect properties in
connection with such Home Equity Loan shall be paid by the
Corporation; provided, further, that the Corporation shall bear
all real estate brokerage, property management, legal, insurance,
and other similar expenses relating to the foreclosure or
collection of the Corporation's Home Equity Loans, to
bankruptcies of borrowers, and to the holding, management and
sale of real estate acquired in the foreclosure of Home Equity
Loans.
(b) rent, telephone, utilities, office furniture
and furnishings and other office expenses incurred by or
allocable to CAAI for its own benefit and account and not that of
the Corporation;
218
<PAGE> 4
(c) processing, documentation, appraisal,
inspection, escrow and other expenses (other than postage which
shall be paid by the Corporation) with respect to the origination
and servicing of Home Equity Loans for the Corporation; and
(d) advertising and promotional expenses
incurred in seeking and originating Home Equity Loans for the
Corporation;
(e) miscellaneous administrative and other
expenses of CAAI not relating to the performance by CAAI of its
functions hereunder.
10. Other Activities of the CAAI. Nothing herein
contained shall prevent CAAI or any of its officers, directors or employees or
any of its Affiliates from engaging in other business activities related to Home
Equity Loans or investments or from undertaking investments permitted to them by
the Corporation's By-laws or from acting as loan originator or loan servicer to
any other person or entity even though such person or entity has investment
policies similar to the Corporation (including another real estate investment
trust). CAAI and its officers, directors or employees and any of its Affiliates
shall be free from any obligation to present to the Corporation any particular
investment opportunity which comes to CAAI or such persons, regardless of
whether such opportunity is within the Corporation's investment policies;
provided, however, that CAAI must inform the Corporation of any investment
opportunities that are within the Corporation's investment policies, but which
CAAI intends to offer first to another public or private entity sponsored by
Affiliates of CAAI.
11. Term; Termination of Agreement. This Agreement
shall commence on the Closing Date and shall continue in force until December
31, 2000, and thereafter shall be renewed for successive terms of four (4) years
unless a notice of non-renewal shall be given in writing by the Corporation to
CAAI not less than 6 months before the expiration of this Agreement or of any
extension thereof. "Closing Date" means the date the Corporation's initial
public offering of common stock becomes effective with the Securities Exchange
Commission. The commencement of the term of this Agreement shall automatically
terminate any prior agreement of the parties relating to the origination and
servicing of Home Equity Loans of the Corporation.
12. Amendments. This Agreement shall not be
changed, modified, terminated or discharged in whole or in part except by an
instrument in writing signed by both parties hereto, or their respective
successors or assigns, or otherwise as provided herein.
13. Affiliate. The term "Affiliate" as used herein
shall mean as to any corporation, partnership or trust (i) any person or entity
which holds beneficially, directly or indirectly, 10% or more of the outstanding
capital stock, shares or equity interests of such corporation, partnership or
trust, or of any person or entity which controls, is controlled by or is under
common control with such corporation, partnership or trust, or (ii) any person
or entity which is an officer, retired officer, director, employee or general
partner of such corporation, partnership or trust, or of any person or entity
controlling, controlled by or under common control with such corporation,
partnership or trust.
14. Assignment. The Corporation may terminate this
Agreement in the event of its assignment by CAAI unless such assignment is to a
corporation or other person which controls, is controlled by, or is under common
control with CAAI, or to a corporation, association, trust or other successor
organization which may take over the property and carry on the affairs of CAAI.
Such an assignment or any other assignment of this Agreement by CAAI shall bind
the assignee hereunder in the same manner as CAAI is bound hereunder. This
Agreement shall not be assignable by the Corporation without the consent of
CAAI, except in the case of assignment by the Corporation to a corporation,
association, trust or other organization which is a successor to the
Corporation. Such successor shall be bound hereunder and by the terms of said
assignment in the same manner as the Corporation is bound hereunder.
15. Default, Bankruptcy, Etc. At the option solely
of the Corporation, this Agreement shall be and become terminated immediately
upon written notice of termination from the Corporation to CAAI if any of the
following events shall occur:
219
<PAGE> 5
(a) If CAAI shall violate any provision of this
Agreement, and after notice of such violation shall not cure such
default within thirty (30) days or if such default cannot be
cured in 30 days, if CAAI does not commence and diligently pursue
the curing of such default; or
(b) If CAAI shall be adjudged bankrupt or
insolvent by a court of competent jurisdiction, or an order shall
be made by a court of competent jurisdiction for the appointment
of a receiver, liquidator or trustee of CAAI or of all or
substantially all of its property by reason of the foregoing, or
for approval of any petition filed against CAAI for its
reorganization, and such adjudication or order shall remain in
force or unstayed for a period of thirty (30) days; or
(c) If CAAI shall institute proceedings for
voluntary bankruptcy or shall file a petition seeking
reorganization under the federal bankruptcy laws, or for relief
under any law for the relief of debtors, or shall consent to the
appointment of a receiver of itself or of all or substantially
all its property, or shall make a general assignment for the
benefit of its creditors, or shall admit in writing its inability
to pay its debts generally, as they become due.
CAAI agrees that if any of the events specified in
subsections (b) and (c) of this Paragraph 14 shall occur, it will give written
notice thereof to the Corporation within seven (7) days after the occurrence of
such event.
16. Action Upon Termination. From and after the
effective date of termination of this Agreement, pursuant to Paragraphs 11, 14
or 15 hereof, CAAI shall not be entitled to compensation for further services
hereunder but shall be paid all compensation accruing to the date of
termination, including compensation which may have been earned under Paragraph 6
hereof. CAAI shall forthwith upon such termination:
(a) pay over to the Corporation all moneys
collected and held for the account of the Corporation pursuant to
this Agreement, after deducting any accrued compensation and
reimbursement for its expenses to which it is then entitled;
(b) deliver to the Corporation a full
accounting, including a statement showing all payments collected
by it and a statement of all moneys held by it, covering the
period following the date of the last accounting furnished to the
Corporation; and
(c) deliver to the Corporation all property and
documents of the Corporation then in the custody of CAAI.
17. Miscellaneous. CAAI assumes no responsibility
under this Agreement other than to render the services called for hereunder in
good faith, and shall not be responsible for any action of the Corporation in
following or declining to follow any advice or recommendations of CAAI. Neither
CAAI nor its shareholders, directors, officers or employees shall be liable to
the Corporation, the holders of securities of the Corporation, or to any
successor or assign of the Corporation except by reason of acts constituting bad
faith, willful misfeasance, gross negligence or reckless disregard of their
duties.
18. Notices. Any notice, report or other
communication required or permitted to be given hereunder shall be in writing
unless some other method of giving such notice, report or other communication is
accepted by the party to whom it is given, and shall be given by being delivered
at the following addresses of the parties hereto:
220
<PAGE> 6
To the Corporation:
Capital Alliance Income Trust
50 California Street, Suite 2020
San Francisco, CA 94111
To CAAI:
Capital Alliance Advisors, Inc.
50 California Street, Suite 2020
San Francisco, CA 94111
Either party may at any time give notice in writing to the other
party of a change of its address for the purpose of this Paragraph 18.
19. Arbitration. The parties hereto agree that any
controversy or claim arising out of or relating to this Agreement shall be
submitted to binding arbitration, in accordance with the rules, then obtaining,
of the American Arbitration Association, with venue in the City and County of
San Francisco, California and judgment on the award rendered may be entered in
any court having jurisdiction.
20. Headings. The paragraph headings hereof have
been inserted for convenience of reference only and shall not be construed to
affect the meaning, construction or effect of this Agreement.
21. Governing Law. The provisions of this Agreement
shall be construed and interpreted in accordance with the laws of the State of
California as at the time in effect.
IN WITNESS WHEREOF, the parties, by an authorized
officer, in each case thereunto duly authorized, have signed these presents all
as of the day and year first above written.
CORPORATION:
CAPITAL ALLIANCE INCOME TRUST,
a Delaware corporation
By:
--------------------------------------
Thomas B. Swartz, Chairman
CAPITAL ALLIANCE ADVISORS, INC.,
a California corporation
By:
--------------------------------------
Dennis R. Konczal, President
221
<PAGE> 1
<TABLE>
<S> <C>
EXHIBIT 10.4 For Office Use Only
- ------------------------------- ---------------------------
CAPITAL ALLIANCE INCOME TRUST ORDER FORM ---------------------------
SOCIAL SECURITY NO.
INVESTOR INFORMATION of investor whose name is printed
Name(s) and addresses will be registered exactly as printed or typed below. on the adjacent line
NAME(s) / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / -- / / / -- / / / / /
------------------------------------------------------------- ------ ---- --------
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
------------------------------------------------------------- or TAX IDENTIFICATION NUMBER
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / -- / / / / / / / /
------------------------------------------------------------- ---- --------------
ADDRESS / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / U.S. Citizen
------------------------------------------------------------- --
CITY / / / / / / / / / / / / / / / / / / / / / / / / / / / / / U.S. Citizen residing outside the U.S.
----------------------------------- State ---- Zip ---------- --
PHONE NUMBER / / / / -- / / / / -- / / / / / / / Residential alien citizen of
------ ------ -------- NY Residents see other -- -------------
side.
/ / Non-Resident alien citizen of
------------------------------------------
UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION PROVIDED IN THIS SECTION IS TRUE, CORRECT AND THAT I AM NOT SUBJECT
TO BACK-UP WITHHOLDING UNDER THE PROVISIONS OF SECTION 3406(a)(1)(C) OF THE INTERNAL REVENUE CODE.
X Date: X Date:
------------------------------ ------------------ ---------------------------------------------------- ------------
====================================================================================================================================
</TABLE>
<TABLE>
<S> <C>
INVESTMENT: Check only one
1. / / INITIAL PURCHASE / / ADDITIONAL PURCHASE Please make check payable to Golden Gate Bank, Escrow Agent"
and send completed order Form and check to:
</TABLE>
<TABLE>
<S> <C>
2. TOTAL PURCHASE PRICE:
No. of Common Shares x$10.00/share = $ Capital Alliance Income Trust
---------- ---------------- c/o Golden Gate Bank
(Minimum $1,000)
3. / / Broker authorized to transfer funds directly from Undersigned's Brokerage 344 Pine Street
Account. San Francisco, CA 94104
====================================================================================================================================
</TABLE>
<TABLE>
<S> <S>
FORM OF OWNERSHIP: Mark only one box. TAX EXEMPT PLANS: Orders for the following registrations
/ / Individual must be signed by the custodian/trustee
/ / Custodian
/ / Joint Tenants with Right / / IRA/SEP (Not for use with
of Survivorship / / Estate Sierra's Prototype)
/ / Community Property / / Trust / / Qualified Retirement Plan (Keogh)
/ / Tenants in Common / / Corporation / / Pension/Profit Sharing Plan
/ / Tenants by the Entirety / / Custodian under UGMA, / / 401(K)
/ / Other State of / / Other
----------------- ---------------------------
-----------------------
or under UTMA, State of
-----------------------
====================================================================================================================================
</TABLE>
<TABLE>
<S> <C>
ADDITIONAL MAILING ADDRESS: If you are investing OPTIONAL CHECK ADDRESS: If you would like your distribution check
through a Trust Company and want duplicate copies of investor mailed to an address other than shown above, please complete this
mailings sent to you, please fill in below. section.
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
NAME(s) ---------------------------------------- PAYEE ------------------------------------------
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
---------------------------------------- ACCT. NO. ----------------------------------------
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
ADDRESS ---------------------------------------- ADDRESS ----------------------------------------
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
---------------------------------------- ----------------------------------------
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
CITY ------------------ State ---- Zip ---------- CITY ------------------ State ---- Zip ----------
====================================================================================================================================
/ / DIVIDEND PAYMENT OPTION: Check this box if dividends are to be paid in cash. Otherwise, Dividends will be reinvested
automatically in additional Shares pursuant to the Dividend Reinvestment Plan.
====================================================================================================================================
</TABLE>
<TABLE>
<S> <C>
BROKER/DEALER INFORMATION: The Registered Representative must sign below to complete order.
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Broker/Dealer Firm ----------------------------------------------------------------------------------------
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Registered Representative ----------------------------------------------------------------------------------------
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Representative Address ----------------------------------------------------------------------------------------
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
City ------------------------------------------------------- State ---- Zip ----------
/ / / / -- / / / / -- / / / / / X
Phone Number ------ ------ -------- --------------------------------------------
Representative's Signature
(Order cannot be accepted without signature).
</TABLE>
222
<PAGE> 1
EXHIBIT 23.1
CONSENT OF COUNSEL
TO CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
We hereby consent to the use in this Registration Statement on
Form S-11, and any amendments or supplements of our form of opinions in respect
to certain tax and ERISA matters and legality as to the issuance of securities,
and to any reference to our firm included in or made a part of the Registration
Statement. In giving this consent, we do not thereby admit that we come within
the category of persons whose consent is required under the Securities Act of
1933, as amended, or the Rules and Regulations promulgated thereunder.
_____________________________
WILSON, RYAN & CAMPILONGO
San Francisco, California
___________________, 1996
223
<PAGE> 1
EXHIBIT 23.2
CONSENT OF NOVOGRADAC & COMPANY LLP
We have issued our reports dated June 25, 1996, March 22, 1996
and March 15, 1996, accompanying the financial statements of Capital Alliance
Income Trust, A Real Estate Investment Trust, Capital Alliance Income Trust I
and Capital Alliance Income Trust II, respectively. We consent to the use of the
aforementioned reports in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts".
Dated: September 3, 1996
224
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned, whose capacity with Capital Alliance Income
Trust, A Real Estate Investment Trust (the "Trust") is set forth below, hereby
constitutes and appoints Thomas B. Swartz and Dennis R. Konczal, and each or
either of them (with full power to act alone), his true and lawful attorneys and
agents with full power of substitution, in the name and on behalf of the
undersigned, to do any an all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable to enable the Trust to comply with the Securities Act of
1933 ("'33 Act"), as amended, and with the Securities Exchange Act of 1934 ("'34
Act"), as amended, and any rules, regulations and requirements of the Securities
and exchange Commission in respect thereof in connection with (i) the
registration under the '33 Act of shares of common stock in the Trust ("Common
Shares"), and warrants to purchase Common Shares (Common Warrants"), and (ii)
any and all amendments thereto or reports that the Trust is required to file
pursuant to the requirements of federal or state securities laws or any rules or
regulations thereunder. The authority granted under this Power of Attorney shall
include but not be limited to the power and authority to sign the name of the
undersigned in the capacity set forth below to a Registration Statement on Form
S-11 to be filed with the Securities Exchange Commission in respect of the
Common Shares and Common Warrants to any and all amendments (including
post-effective amendments) to that Registration Statement in respect of the
same, to any and all instruments or documents filed as a part of or in
connection with that Registration Statement and those amendments, and to any
Forms 10-K required to be filed by the Trust; and the undersigned hereby
ratifies and confirms all that those attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney on August 6, 1996.
s/s
-----------------------------------------
Name: Thomas B. Swartz
Position: Chairman
225
<PAGE> 1
EXHIBIT 24.2
POWER OF ATTORNEY
The undersigned, whose capacity with Capital Alliance Income
Trust, A Real Estate Investment Trust (the "Trust") is set forth below, hereby
constitutes and appoints Thomas B. Swartz and Dennis R. Konczal, and each or
either of them (with full power to act alone), his true and lawful attorneys and
agents with full power of substitution, in the name and on behalf of the
undersigned, to do any an all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable to enable the Trust to comply with the Securities Act of
1933 ("'33 Act"), as amended, and with the Securities Exchange Act of 1934 ("'34
Act"), as amended, and any rules, regulations and requirements of the Securities
and exchange Commission in respect thereof in connection with (i) the
registration under the '33 Act of shares of common stock in the Trust ("Common
Shares"), and warrants to purchase Common Shares (Common Warrants"), and (ii)
any and all amendments thereto or reports that the Trust is required to file
pursuant to the requirements of federal or state securities laws or any rules or
regulations thereunder. The authority granted under this Power of Attorney shall
include but not be limited to the power and authority to sign the name of the
undersigned in the capacity set forth below to a Registration Statement on Form
S-11 to be filed with the Securities Exchange Commission in respect of the
Common Shares and Common Warrants to any and all amendments (including
post-effective amendments) to that Registration Statement in respect of the
same, to any and all instruments or documents filed as a part of or in
connection with that Registration Statement and those amendments, and to any
Forms 10-K required to be filed by the Trust; and the undersigned hereby
ratifies and confirms all that those attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney on August 6, 1996.
s/s
----------------------------------------------
Name: Dennis R. Konczal
Position: President
226
<PAGE> 1
EXHIBIT 24.3
POWER OF ATTORNEY
The undersigned, whose capacity with Capital Alliance Income
Trust, A Real Estate Investment Trust (the "Trust") is set forth below, hereby
constitutes and appoints Thomas B. Swartz and Dennis R. Konczal, and each or
either of them (with full power to act alone), his true and lawful attorneys and
agents with full power of substitution, in the name and on behalf of the
undersigned, to do any an all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable to enable the Trust to comply with the Securities Act of
1933 ("'33 Act"), as amended, and with the Securities Exchange Act of 1934 ("'34
Act"), as amended, and any rules, regulations and requirements of the Securities
and exchange Commission in respect thereof in connection with (i) the
registration under the '33 Act of shares of common stock in the Trust ("Common
Shares"), and warrants to purchase Common Shares (Common Warrants"), and (ii)
any and all amendments thereto or reports that the Trust is required to file
pursuant to the requirements of federal or state securities laws or any rules or
regulations thereunder. The authority granted under this Power of Attorney shall
include but not be limited to the power and authority to sign the name of the
undersigned in the capacity set forth below to a Registration Statement on Form
S-11 to be filed with the Securities Exchange Commission in respect of the
Common Shares and Common Warrants to any and all amendments (including
post-effective amendments) to that Registration Statement in respect of the
same, to any and all instruments or documents filed as a part of or in
connection with that Registration Statement and those amendments, and to any
Forms 10-K required to be filed by the Trust; and the undersigned hereby
ratifies and confirms all that those attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney on August 6, 1996.
s/s
------------------------------------------------------
Name: Douglas A. Thompson
Position: Executive Vice-President
227
<PAGE> 1
EXHIBIT 24.4
POWER OF ATTORNEY
The undersigned, whose capacity with Capital Alliance Income
Trust, A Real Estate Investment Trust (the "Trust") is set forth below, hereby
constitutes and appoints Thomas B. Swartz and Dennis R. Konczal, and each or
either of them (with full power to act alone), his true and lawful attorneys and
agents with full power of substitution, in the name and on behalf of the
undersigned, to do any an all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable to enable the Trust to comply with the Securities Act of
1933 ("'33 Act"), as amended, and with the Securities Exchange Act of 1934 ("'34
Act"), as amended, and any rules, regulations and requirements of the Securities
and exchange Commission in respect thereof in connection with (i) the
registration under the '33 Act of shares of common stock in the Trust ("Common
Shares"), and warrants to purchase Common Shares (Common Warrants"), and (ii)
any and all amendments thereto or reports that the Trust is required to file
pursuant to the requirements of federal or state securities laws or any rules or
regulations thereunder. The authority granted under this Power of Attorney shall
include but not be limited to the power and authority to sign the name of the
undersigned in the capacity set forth below to a Registration Statement on Form
S-11 to be filed with the Securities Exchange Commission in respect of the
Common Shares and Common Warrants to any and all amendments (including
post-effective amendments) to that Registration Statement in respect of the
same, to any and all instruments or documents filed as a part of or in
connection with that Registration Statement and those amendments, and to any
Forms 10-K required to be filed by the Trust; and the undersigned hereby
ratifies and confirms all that those attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney on _____________, 1996.
----------------------------------------
Name: Stanley C. Brooks
Position: Director
228
<PAGE> 1
EXHIBIT 24.5
POWER OF ATTORNEY
The undersigned, whose capacity with Capital Alliance Income
Trust, A Real Estate Investment Trust (the "Trust") is set forth below, hereby
constitutes and appoints Thomas B. Swartz and Dennis R. Konczal, and each or
either of them (with full power to act alone), his true and lawful attorneys and
agents with full power of substitution, in the name and on behalf of the
undersigned, to do any an all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable to enable the Trust to comply with the Securities Act of
1933 ("'33 Act"), as amended, and with the Securities Exchange Act of 1934 ("'34
Act"), as amended, and any rules, regulations and requirements of the Securities
and exchange Commission in respect thereof in connection with (i) the
registration under the '33 Act of shares of common stock in the Trust ("Common
Shares"), and warrants to purchase Common Shares (Common Warrants"), and (ii)
any and all amendments thereto or reports that the Trust is required to file
pursuant to the requirements of federal or state securities laws or any rules or
regulations thereunder. The authority granted under this Power of Attorney shall
include but not be limited to the power and authority to sign the name of the
undersigned in the capacity set forth below to a Registration Statement on Form
S-11 to be filed with the Securities Exchange Commission in respect of the
Common Shares and Common Warrants to any and all amendments (including
post-effective amendments) to that Registration Statement in respect of the
same, to any and all instruments or documents filed as a part of or in
connection with that Registration Statement and those amendments, and to any
Forms 10-K required to be filed by the Trust; and the undersigned hereby
ratifies and confirms all that those attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney on _____________, 1996.
----------------------------------------
Name: Harvey Blomberg
Position: Director
229
<PAGE> 1
EXHIBIT 24.6
POWER OF ATTORNEY
The undersigned, whose capacity with Capital Alliance Income
Trust, A Real Estate Investment Trust (the "Trust") is set forth below, hereby
constitutes and appoints Thomas B. Swartz and Dennis R. Konczal, and each or
either of them (with full power to act alone), his true and lawful attorneys and
agents with full power of substitution, in the name and on behalf of the
undersigned, to do any an all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable to enable the Trust to comply with the Securities Act of
1933 ("'33 Act"), as amended, and with the Securities Exchange Act of 1934 ("'34
Act"), as amended, and any rules, regulations and requirements of the Securities
and exchange Commission in respect thereof in connection with (i) the
registration under the '33 Act of shares of common stock in the Trust ("Common
Shares"), and warrants to purchase Common Shares (Common Warrants"), and (ii)
any and all amendments thereto or reports that the Trust is required to file
pursuant to the requirements of federal or state securities laws or any rules or
regulations thereunder. The authority granted under this Power of Attorney shall
include but not be limited to the power and authority to sign the name of the
undersigned in the capacity set forth below to a Registration Statement on Form
S-11 to be filed with the Securities Exchange Commission in respect of the
Common Shares and Common Warrants to any and all amendments (including
post-effective amendments) to that Registration Statement in respect of the
same, to any and all instruments or documents filed as a part of or in
connection with that Registration Statement and those amendments, and to any
Forms 10-K required to be filed by the Trust; and the undersigned hereby
ratifies and confirms all that those attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney on August 6, 1996.
s/s
------------------------------------
Name: Jeannette Hagey
Position: Controller
230
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
FINANCIAL STATEMENTS OF CAPITAL ALLIANCE INCOME TRUST I FOR THE FOUR MONTHS
ENDED APRIL 30, 1995 AND 1996 (UNAUDITED), AND THE YEARS ENDED DECEMBER 31,
1993, 1994 AND 1995 (AUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<NAME> CAPITAL ALLIANCE INCOME TRUST I
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> YEAR 4-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 APR-30-1996
<CASH> 170649 591980
<SECURITIES> 0 0
<RECEIVABLES> 3067327 2740126
<ALLOWANCES> 12000 26000
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 3326489 3406432
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
997 997
<COMMON> 3271833 3231587
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 3326489 3406432
<SALES> 0 0
<TOTAL-REVENUES> 377363 154542
<CGS> 0 0
<TOTAL-COSTS> 46966 13472
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 12000 14000
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 318397 127070
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 318397 127070
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 318397 127070
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<FN>
AMOUNTS LISTED UNDER COMMON STOCK AND PREFERRED STOCK
REPRESENT CLASS A AND CLASS B BENEFICIAL INTERESTS,
RESPECTIVELY, IN THE BUSINESS TRUST.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
FINANCIAL STATEMENTS OF CAPITAL ALLIANCE INCOME TRUST II FOR THE FOUR MONTHS
ENDED APRIL 30, 1995 AND 1996 (UNAUDITED), THE PERIOD FROM OCTOBER 18, 1994
(INCEPTION) TO DECEMBER 31, 1994 (AUDITED) AND THE YEAR ENDED DECEMBER 31, 1995
(AUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL
STATEMENTS.
</LEGEND>
<NAME> CAPITAL ALLIANCE INCOME TRUST II
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> YEAR 4-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 APR-30-1996
<CASH> 753,551 631,559
<SECURITIES> 0 0
<RECEIVABLES> 2,074,012 2,133,260
<ALLOWANCES> 0 6,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 2,927,563 2,860,819
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
1,960 1,000
<COMMON> 2,815,240 2,770,351
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 2,927,563 2,860,819
<SALES> 0 0
<TOTAL-REVENUES> 112,000 119,167
<CGS> 0 0
<TOTAL-COSTS> 15,983 13,594
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 6,000
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 96,017 99,573
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 96,017 99,573
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 96,017 99,573
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<FN>
AMOUNTS LISTED UNDER COMMON STOCK AND PREFERRED STOCK REPRESENT CLASS A AND
CLASS B BENEFICIAL INTERESTS, RESPECTIVELY, IN THE BUSINESS TRUST.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
PRO-FORMA COMBINED FINANCIAL STATEMENTS OF CAPITAL ALLIANCE INCOME TRUST, A REAL
ESTATE INVESTMENT TRUST AT APRIL 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<NAME> CAPITAL ALLIANCE INCOME TRUST, A REAL ESTATE
INVESTMENT TRUST
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-30-1996
<PERIOD-END> APR-30-1996
<CASH> 1,223,539
<SECURITIES> 0
<RECEIVABLES> 4,872,636
<ALLOWANCES> 32,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,269,617
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
6,437
<COMMON> 0
<OTHER-SE> 5,996,631
<TOTAL-LIABILITY-AND-EQUITY> 6,269,617
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
IMPOUND AND ESCROW AGREEMENT
Agreement made as of the date set forth below by and between
Capital Alliance Income Trust, A Real Estate Investment Trust, a Delaware
corporation (the "Trust" or "CAIT") and Golden Gate Bank, San Francisco,
California (the "Bank" or "Escrow Holder").
NOW, THEREFORE, in consideration of the mutual agreements herein
set forth, the parties hereby agree as follows:
1. Registration Statement. A copy of the Trust's registration
statement for its proposed public offering (the "Offering") of shares in the
Trust and warrants to purchase shares in the Trust, S.E.C. registration no.
33-________) (the "Registration Statement") has been deposited with the Bank by
the Trust and will become effective on or about _______________, 1996.
2. Deposits. The Bank, or its designated agent, shall receive
from each subscriber in the Offering all checks made payable to the Bank and
accompanied by a corresponding order form stating, among other things, the name
of the subscriber, current address and amount of the investment. Any deposits
received without a properly executed order from or check shall be returned and
not accepted.
On the same day orders and checks are received, the Bank, as
agent for the Trust, shall deposit said funds into an interest bearing account
entitled "Golden Gate Bank, Escrow Agent for CAIT" Escrow, No. ______________ as
agent for the Trust. Said account shall be opened at the main office of Bank.
This account shall give Escrow Holder (the "Bank") the irrevocable right to
withdraw funds for deposit into escrow at such time as said funds are required
for escrow purposes.
3. Interest on Deposited Cash Funds. All cash funds deposited in
the escrow account shall be placed in an interest-bearing savings or other
interest-bearing account or instrument (collectively, the "Account") and shall
bear interest until the release of such cash funds from the Account at the then
current rate.
4. Failure to Deposit Minimum Subscription Amount. Funds will be
held in escrow hereunder pending satisfaction of the following condition (The
"Escrow Condition"):
Deposit with the Bank under this Agreement of the Minimum
Subscription Amount of $750,000 (the "Minimum Subscription Amount").
If, on the date one year from the effective date of the
Registration Statement (or any extension thereof that is authorized by the
Registration Statement) (the "Impound Date") all the Escrow Conditions are not
satisfied, the Bank shall release to the subscribers all monies deposited
pursuant to such subscriptions, all Order Forms and all earnings on such monies
net of escrow costs, after first having received an executed written request
from the Trust requesting such release. The Trust agrees that in that event the
full amount on deposit, including all earnings, will be distributed as is herein
provided. All cash disbursements shall be mailed by first class United States
mail, postage prepaid, to the addresses shown on the subscription agreement. In
the event of cancellation, the Trust shall furnish Escrow Holder (the "Bank")
with a schedule of the interest payable to each subscriber. The decision of the
Trust in allocating the interest earned on the subscription funds shall be final
and binding on all of the parties hereto and on all subscribers.
5. Deposit of Minimum Subscription Amount. If all the Escrow
Conditions are satisfied on or before Impound Date, the Bank shall release to
the Trust those subscriptions, and the principal amount of all monies deposited
therewith, and all interest earned thereon after first having received an
executed written request of the Trust requesting such release. The Trust shall
be responsible for forwarding all interest earned net of escrow costs to the
subscribers. Prior to the satisfaction of the Minimum Subscription Amount, the
monies in such escrow shall remain the property of the subscribers but shall not
be subject to withdrawal by the subscribers prior to the Impound Date. Any
attachment of the subscribers' interest in such monies shall be subject to the
terms of this Agreement.
6. Signatures for Disbursements. The signature of the Trust's
officer, as it shall appear on an authorized document to be submitted to the
Bank by the Trust, shall serve as authorization to the Bank to make any and all
235
<PAGE> 2
disbursements on behalf of the Trust. The Bank shall be protected in acting
upon, recognizing, or otherwise relying upon any paper or documents believed by
it to be genuine and believed by it to have been signed by the person or persons
by whom it purports to have been signed.
7. Rights of Persons Placing Orders. The Trust hereby
acknowledges and shall make a good faith effort while this Agreement remains in
effect to insure that each subscriber is made aware of the fact that his monies
shall be deposited with the Bank and shall remain subject to this Agreement, and
that such person whose monies are delivered into the escrow account shall only
have the rights with respect to those monies as are set forth herein and in the
prospectus which is a part of the Registration Statement.
8. Amendments and Modifications. This Agreement shall not be
amended, modified, or supplemented except by a writing executed between the
parties hereto.
9. Compliance with Offering. The parties hereto hereby agree that
the escrow account shall be administered in strict compliance with the terms of
this Agreement and the terms of the Registration Statement, and the Trust
warrants that the terms are consistent with the Registration Statement. The
Trust further understands and agrees that the Bank shall maintain the right and
power to immediately resign as depository at any time, without penalty,
effective upon the giving of written notice thereof to the Trust. In that event,
all monies held by the Bank will be transferred to a successor escrow holder as
may be designated by the Trust.
10. Obligation of Bank to Check Compliance. The Bank shall not be
obligated to check the compliance of any subscription or monies received with
any requirements of the Offering, except to the extent expressly requested in
writing by the Trust and agreed to by the Bank. The Bank shall not be
responsible for the collection of any funds not paid by the banks upon which
subscribers' checks are drawn. All checks deposited herein must clear the normal
banking channels prior to the release of any funds.
11. Reports. The Bank shall furnish to the Trust on a bi-monthly
basis beginning fifteen (15) days after the effective date, a written report
that details all monies on deposit hereunder and a list of all subscribers
represented thereby. At the end of the escrow period, the Bank will provide a
statement on the aggregate amount received from each subscriber and a statement
showing the monthly interest earned on the total principal held in the escrow
account.
12. Escrow Fees. The Trust hereby agrees to pay to the Bank for
all services rendered hereunder, the fees and costs set forth in Exhibit "A"
hereto.
The fees and usual charges agreed upon for the Banks services
hereunder shall be considered compensation for its ordinary services as
contemplated by this Agreement, and in the event that the conditions of this
escrow are not promptly fulfilled or that the Bank renders any service hereunder
not provided for, or that there is any assignment of any interest in the subject
matter of this escrow or modification hereof, or that any controversy arises
hereunder or that the Bank is made a party to, or intervenes in, any litigation
pertaining to this escrow or the subject matter thereof, the Bank shall be
reasonably compensated for such extraordinary services and reimbursed for all
costs and expenses occasioned by such default, delay, controversy, or
litigation, and it shall have the right to retain all documents and/or other
things of value at any time held by it hereunder until such compensation, fees,
costs and expenses shall be paid.
13. Limitation of Liability of the Bank. The parties hereto
expressly recognize that under no circumstances shall the Bank be held liable
for the legality or validity or veracity of the Offering or any other offering
of the Trust, and, instead, the Bank's sole concern and responsibility shall be
to hold the monies in escrow and to invest the same as herein provided until the
Escrow Conditions are satisfied according to the conditions stated herein. By
the acceptance of this escrow, Bank in no way makes any warranties and/or
endorsements to any investors for this offering and is solely acting as escrow
agent for the holding of funds deposited herein in accordance with the within
instructions. The undersigned acknowledge that they have not represented Bank in
any other capacity to investors, either written or implied. The Trust further
acknowledges that the Bank shall not be held liable for the sufficiency or
correctness as to form, manner of execution or validity of any Order Form,
deposit receipt, or other instrument which may be deposited with the Bank
pursuant to this Agreement, or as to the identity, authority or rights of any
person subscribing for any Shares, or for any such person's failure to comply
with any of the provisions of the Subscription Agreement. The Bank is not to be
concerned with the issuance of
236
<PAGE> 3
shares of common or preferred stock of the undersigned and the same shall be
handled completely outside of escrow. The Bank is only to be concerned with the
terms and conditions as set forth herein.
14. Conflicting Demands. In the event conflicting demands are
made upon the Bank with respect to the escrow account, the Trust acknowledges
and agrees that the Bank shall have the absolute right to elect to do any or all
of the following: withhold and stop all further proceedings in performance of
this Agreement; act only upon the joint instructions of the Trust and any
subscriber (or any agent of the subscriber) theretofore making a conflicting
demand; or file a suit in interpleader and obtain an order from a court with
jurisdiction over such matter which requires the parties to interplead and
litigate in such court their several claims and rights against each other. In
the event an interpleader suit is brought, the Bank, at its election, shall be
fully released and discharged from all obligations to further perform any and
all duties or obligations imposed upon it under this Agreement, and the Trust
agrees to pay and reimburse the Bank for all costs, expenses, and reasonable
attorneys' fees expended or incurred by it in the defense or prosecution of such
interpleader suit as such amounts shall be fixed and deemed reasonable by the
court. Any funds and subscriptions held in the escrow which are subject to any
such conflicting demands shall not be included in computing the total funds and
subscriptions held hereunder.
The Bank shall promptly give notice to the Trust of any demands,
requests, orders, or other notices received by it from any subscriber or any
person purporting to represent any subscriber (including a conservator,
guardian, executor or administrator) where such demands, request, order, or
other notice relates to the withdrawal of all or any part of the sums on deposit
in the escrow account.
15. Hold Harmless and Lien. The Trust hereby agrees to pay on
demand, as well as to hold harmless and to indemnify the Bank from and against,
all costs, damages, judgments, attorneys' fees, obligations, and liabilities of
every kind or nature (other than its normal and usual operating expenses
incurred in the Bank's performance hereunder), which, in good faith, the Bank
may incur or sustain in connection with or arising out of this Agreement. The
Trust further grants hereby to the Bank a lien upon all rights, titles, and
interests of the Trust in all of the documents and monies and other property
deposited in escrow pursuant to this Agreement, in order that the Bank may
protect its rights and to indemnify and reimburse itself as it may be permitted
to do so pursuant to this Agreement.
16. Relationship between Parties. The parties hereto expressly
recognize that this Agreement only creates an escrow account into which up to
the Minimum Subscription Amount shall be placed in impound, and otherwise this
Agreement does not create any legal relationship whatsoever between the parties
hereto.
17. Termination. This Agreement shall terminate effective upon
payment under either Section 4 or 5 hereof. Provided, however, that this
agreement shall not be so terminated until all fees, costs and expenses of the
Bank have been paid.
18. Notices. All instructions, notices, and demands herein
provided for shall be in writing and shall be mailed postage prepaid, first
class mail, as follows:
If to the Trust, to:
Capital Alliance Income Trust,
A Real Estate Investment Trust
50 California Street, Suite 2020
San Francisco, California 94111
Attn: Thomas B. Swartz, Chairman
If to the Bank, to:
Golden Gate Bank
344 Pine Street
San Francisco, CA 94104
Attn: James Woolwine, President
237
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on _______________, 1996.
"TRUST"
CAPITAL ALLIANCE INCOME TRUST,
A REAL ESTATE INVESTMENT TRUST
By: __________________________________
Its: __________________________________
"BANK"
GOLDEN GATE BANK
By: __________________________________
Its: __________________________________
238
<PAGE> 5
EXHIBIT A
<TABLE>
1. Fee Schedule
------------
<S> <C>
Escrow Fee (Acceptance & Administration, $_________
payable at inception
Processing Fee, Per Name _________
Refund of Subscription Amount and/or
Pro-Rata Calculation of Interest Earned,
Per Name _________
Tax Reporting, Per form _________
Wiring of Funds (Received/Disbursed) _________
SIGNATURE DATE
Trust: _________________________________ ___________________, 1996
Bank: _________________________________ ___________________, 1996
</TABLE>
239
